07 Nov Time Isn’t Money. Production Is Value
The story goes that Henry Ford once hired an efficiency expert to evaluate his company. After a few weeks, the expert made his report, which was highly favorable except for one thing.
“It’s that man down the hall,” said the expert. “Every time I go by his office he’s just sitting there with his feet on his deck. He’s wasting your money.”
“That man,” replied Mr. Ford, “once had an idea that saved us millions of dollars. At the time, I believe his feet were planted right where they are now.”
Reader’s Digest, August, 1981
I’ve thought of this piece a lot over the years. If time is money, then the fellow in the office with his feet up should no longer be employed. He’s clearly not being currently productive. Just sitting around, waiting for the next big idea to hit. Maybe that idea will never come. Yet there he is, because of the value, or product, he once brought to the company. If a product is valued enough, people are willing to pay the right price, regardless of how long it takes to deliver it.
When we go to buy something, we buy the product. If you’re manufacturing bobbles, it’s easy to identify the product you sell. The bobble’s retail price has already taken into account the materials, staff wages, shipping and packaging, plus a margin of profit. But for those in the service industries, from cleaners to bookkeeping, how is a product defined, or do you consider your service to be a product at all?
Convert Hours to Products
To answer the latter part first, yes, a clean house or a posted set of books is a product. It’s a specific thing that the customer has sought out your production process to create. But why should a service based industry re-examine themselves as a product based industry? Because the advantages can be major. More money, less stress, and more success.
The problem with billing by the hour is two fold. The first problem is that it limits your ability to succeed. Once you have a set price for how much the service costs by the hour, the only way to make more money at it is to work more hours. This would be okay if it weren’t for the second problem, that as technology and process improves, your revenue then decreases. Where it used to take a couple hours to clean a drive way with a hose and brooms for example, now with a pressure washer it takes a half hour. Suddenly with efficiency, you now need more clients to maintain your profit level as well.
But consider the same situation if driveway cleaning is priced as a product. For a one car 30 foot driveway, the price is $300.00 to clean. Suddenly the second problem, of improved technology, now becomes a benefit! Instead of it being a bad thing that it takes 1/4 of the time to do, it’s suddenly great because it means more ‘Product’ (clean driveways) can be delivered without spending more time, more effort, or longer hours to do it. You can still get more clients if you want to, and work more hours if you want to, but now it’s because of want instead of necessity.
How can a service industry transition to a product based industry?
Much like creating a fine oak cabinet versus a cheap particle board desk, it’s important to take into consideration:
a. What will the materials cost for you to do the job
b. What is the expected quality of the final product
c. How long will it take to complete
For a bookkeeping service for example, the materials are fairly easy to figure out. It includes office supplies, software and utilities.
For the second one, quality, this can be a bit more difficult to determine. Of course the client will expect the end result to be accurate, however quality can also be referring to adding up all like-expenses on a till tape and plugging it in as one lump sum, versus posting each item to have a highly accurate history. Is it cash based accounting or accrual based? The latter requires nearly twice the entries as each expense or revenue is first posted to accounts payable or receivable, and then later marked as paid or received.
The quality is also closely related to the third item of how long it will take to complete. A good way to determine this is to take the quality desired and factor it against the size of the bank or credit card statements to be reconciled. Of course the longer it takes, chances are the more office supplies it requires.
Costs + Time = Price
Once these three things have been determined, a Product Price can then be determined. So if a client walks in wanting bookkeeping done on their cash based three page bank statement, it easy to say how much their monthly bill will be. Be sure to NOT put the number of hours on the invoice for the product. Instead, agree to a period of time where the product price will be re-evaluated. For a new client, three or six months may be appropriate. For others, maybe annual review will suffice.
With the hours omitted from the invoice and the price of the product already determined, you are now free to save as much time as you want without negatively affecting your bottom line. In fact, it will only positively affect it! If you take a report that was being populated by hand, and find a way to automate it for the client, that’s now money in your pocket; not the client’s. Meanwhile the client is still receiving an excellent product from you, likely more accurately than before, so they’re still satisfied paying the same amount, even though unknowing to them it’s taking you less time to complete the task.
Business Improved While Doing Business As Usual
Is this a dishonest way of doing business in a service industry? No, absolutely not. Again, remember that what you provide is a product. If you go to buy a car, they’re not priced by whether they were built on an ambitious and efficient Monday, or a dragged out Friday. The cost of the production of that product is a concern of the producer, not the end user. So long as the end user is getting the same quality of product regardless if it was made on a Monday or Friday, that’s the only standard to measure up to.
Plus think about how efficient auto makers are now, yet the price of cars hasn’t really gone down. That’s because even though their processes have become more efficient, we still instill the same value in the product they provide. Much like bookkeeping, or cleaning, or washing driveways are also valued products, regardless of the time spent, value will always be found in a quality delivered product.