The Trailblazer of Modern Accounting: Ron Baker

Ron Baker is a pioneer in the field of modern accounting. He joins John Randolph for this first installment of a special two part episode of CPA Life, and the two delve deep into the groundbreaking topics of value and subscription-based pricing and client advisory services that are reshaping the landscape of public accounting. An advocate for getting free of traditional timekeeping since 1989, Ron has written eight books on this and other topics, and given his experience at a Big Four firm early in his career, he soon realized that the underpinnings of the issues facing the profession all come back to keeping time, what he calls “plunging a ruler into the oven to check the temperature—it’s the wrong measuring stick.”

Transcript:

Hey everyone. Welcome to another episode of the CPA Life Podcast. The show that focuses a spotlight on some of today’s key voices in the public accounting industry, folks that are laser focused on building a more modern minded future focused firm. And today we are going to spend some time digging into a couple of those areas that seem to be hot buttons for firm owners and leaders, topics of value pricing, subscription based pricing, and the wonderful CAS, or client advisory services, with a long time influencer and a guy that knows quite a bit about those topics: Mr. Ron Baker. Ron, thanks for joining us.

No, thanks for having me, John. Looking forward to it.

You know, for those that are just dipping their toe in the water on these topics, or maybe they’ve been living under a rock, Ron has been an ardent advocate for ditching the century old timesheet billing model for a value based or subscription based model. And you’ve written, is it seven books?

Eight.

Eight books. So one of those books, which we talked a little bit about earlier, is a book that I’ve been reading for probably about two months now. It’s one of those reads also that, The Firm of the Future that you’ve got to, you dig into and you got to take a step back and you got to digest just a little bit. It’s not something you pick up and read through in two weeks.

It’s not a beach read, I agree. In fact, all my books are kind of like that.

There’s a lot of good stuff in there. One of the ones that I’m looking forward to reading also, and again we talked a little bit about this before we started recording, Mind Over Matter, a book that really focuses on the importance of embracing and understanding how we’ve gone from a physical, tangible, material based economy to one where really the true currency is the people, the ideas, the knowledge that exists within a firm.

So we’ll talk a little bit about those things, but stereotypically, Ron, we spend the first few minutes of our show talking with guests about how they got to this point in their career journey. And you had a fairly traditional start coming out of college and working for a Big Four firm that was, was it Big Eight at that time?

Big Eight. Yeah. That’s how you carbon date a CPA, did they say Big Four, Six, Five, Eight? Yeah. So you can put me in the right era. I’m a Big Eight guy. In fact, I’m Peat Marwick Mitchell. It’s even worse.

I was going to ask you, which firm did you work for? Cause I know that it was KPMG, but I was going to ask you what the legacy firm was.

I left right before they merged with Main Hurdman, which is where I guess they got the G in there or something or the, yeah, anyway.

Something in there. So walk us through the history and a little information about the two roles that you’ve had the last couple of decades as the owner and founder of VeraSage and the radio host of Voice of America Radio.

Real quick, I actually knew I wanted to become a CPA when I was in high school and had a really good accounting teacher. He was fantastic. He had a two year program, not a one year, but a two year. He also taught us taxes. So we ran, I ran a tax clinic in the school. Kids would come in with their W-2s, I’d fill out their return, they’d slip me a twenty, you know, because they’re getting a refund and they were all excited. I interned for a CPA when I was in high school. I was his TA in the third year. And he just inspired me. He’d bring in CPAs to the class to talk from industry, we had an FBI guy come in and he had a major impact on me.

And I ran my own accounting firm in high school. My dad was a barber. I did his books. I did a bunch of his friends’ books. I defended them in front of the IRS, actually went in with a signed power of attorney. I’m not even 18 years old. They let me do it. And so I was billing time. I was filling out a timesheet as a, you know, as a high school kid, because that’s what all the CPAs taught me. I joined the Big Eight after I graduated. And when I left the Big Eight after two and a half years, I started my own practice and that’s when I learned really, really fast that the billable hour was kind of a crappy customer experience. I got tired of people coming in or calling me, why didn’t you tell me it costs so much?

And the only answer I had, John, was, I spent the time, look at my time sheet. I spent the time. And the customers don’t care about the time, right? And they care about the result, the end product. I just walked into my partner one day. I said, you know, and this was 1989, by the way, I said, Justin, we got to go to fixed prices. “We can’t do that. We don’t know how long something’s going to take.” I said, no, don’t give me that. I said, mechanics do it. Everybody gives us a fixed price. We can do the same thing. And we just started doing it.

Because I was studying companies that back then were called TQS leaders, which was total quality service. Now we would call it customer experience. And it was companies like Nordstrom and Disney and Lexus and FedEx, all these companies that I truly admired. And I said, I want to be like them. And we did it. The customers love the certainty. We made every mistake under the sun. We didn’t do a lot of things that I’ve learned since and teach, you know, about offering three options about having a value guarantee, all these different economic and marketing things. We didn’t do any of that when we first started, but the customers loved it. So we stuck with it. And it also allowed us, well, guess what? If you’re not selling time, no need to measure it. So we got rid of timesheets. This is all in 1989. There’s nobody on the circuit talking about it. There’s no books about it, at least not in the professional space.

And we stuck with it because the customers loved it. The feedback we got from the customers was amazing. And we just kept getting better and better and better. It allowed us to raise our prices. It allowed us to get rid of a lot of low value customers. And then I got so excited, I started teaching it to the Cal CPA society foundation. And then in ’98, I wrote a book. That book was kind of picked up by Paul Dunn and Rick Payne out of Australia, waved around the world on various stages, it sold 40,000 copies, which was kind of interesting. It was a $150 book and that’s what got me out of my practice and into starting VeraSage, and consulting, and writing and speaking, which is what I do still today.

So was that kind of the impetus that you kind of said, hey, this is something that needs to be said as loud as possible to as many people that will listen?

Yep, and I screamed it. I was very cantankerous when I started doing this because the arguments I had with people were amazing and I just wouldn’t back down. I love to debate and I love to go after people and I love to try and change their thinking. I’ve since mellowed in my old age, but yeah, I really hit the scene with a bold vision that we shouldn’t be doing this as a profession. We’re professionals for crying out loud. That means we stand for things. We profess things, and I don’t want to be known as the guy who did his timesheet on time. That’s not how I’m measured. It’s not predictive of the success of a CPA. It has nothing to do with what I do or how I add value. It’s not a good measuring rod. It’s like plunging a ruler into the oven to determine its temperature. It’s just the wrong measuring stick.

You know, it’s interesting that you use the analogy a minute ago, or you referenced, you know, hey, mechanics do this. And I hadn’t thought about that, Ron. And the reason why that hits home with me is because my dad was a mechanic and I remember explicitly having a conversation with my dad in high school, because I’d go—working with my dad during summers in South Texas was one of the reasons why I decided, I don’t know what I want to do for a living, but I know what I don’t want to do. I don’t want to work in South Texas in the summer outside under a car.

So I got to go to college and do something different, but I remember one day talking to my dad about, hey, how do you know how much to charge somebody for an oil change or rebuilding their transmission? And he took me into his office. And he took out, I want to say it was, it was from a company called Chilton. Chilton’s Automotive.

Chilton. That’s right.

And he shows me this book where you flip through and it says, here’s the make and model of the car. We need to rebuild the transmission. Here’s how long it’s going to take you, ballpark. This is probably what you should charge. He’s like, so it gives me an idea that it’s probably going to take me X amount of hours to do this. So I’m going to charge X amount. And I asked him, well, what if it takes you less than that? That’s what I charge. What if it takes you longer? That’s what I charge. I better figure out how to do it in a shorter period of time. I hadn’t thought about that until you just said that, but there’s a lot of common sense surrounding that.

Even though they still have an hourly rate, a shop rate, but the thing is, like he said, if he can get it done in half the time that Chilton says it should take, they’re still going to charge that same amount. And we learned the same thing really fast. We put a fixed price on something and it might take us half of what we expected, because we found a better way to do it. Or we automated something or came up with a, you know, macro on a spreadsheet or whatever. And we didn’t pass that along to the customer because we got the job done quicker, they were even more satisfied. I often joked back in the day that if CPAs owned the Concord, it would be cheaper. Which makes no sense, because it only takes half the time to fly to London, so we can only charge half the billable hours. I mean it’s crazy! the slowest horse wins the race in the billable hour, it just misaligns the incentive. We want to spend as much time as possible and the customer wants their work done as quickly as possible.

I’ve contended for a handful of years now when I have this conversation with people, I’ve never asked my CPA how long did it take you to do my tax return. Never.

Or how long did it take Honda to build your car or whatever. I mean, it’s a crazy paradigm and it goes back to the labor theory of value, which you’re reading about in The Firm of the Future. And all my books talk about that. I mean, it’s a very old, old discredited economic theory.

So one of the things that we’ll constantly hear from clients when they’re still in an hourly billable model, or even a model that maybe they’re doing some subscription based pricing or value based pricing, but that timesheet is still in the picture.

Right.

So, in some way, shape, form, or fashion, that timesheet is either the barometer of what we bill by, or it’s a piece of our business. One of the things we hear from them is, we’ve got to be able to measure. If we don’t have that, we can’t measure, we can’t measure productivity, we can’t measure profitability, we can’t measure, you know, we can’t measure. What do you say to that firm leader to that firm owner that makes that argument?

Well, there obviously, we can measure without the time sheet. We do it anyway. We have an income statement. We have cash flow we can look at. We can do capacity planning. We can do proper project management by forecasting time into the future, like real project managers do. Project managers don’t lay awake wondering why they spent, you know, a hundred hours over budget. They lay awake trying to figure out am I going to get my stuff done by the deadline that we promised the customer? This is why FedEx measures on time delivery, right? What you care about from your UPS driver today is they drop your wine shipment by the time that they specified. I mean, Domino’s Pizza does this, right? It shows you a pizza tracker. We’re going to get there in a half hour or whatever.

We can measure all sorts of things that aren’t time related. We should be measuring things that the customer cares about. How does the customer define the success of their CPA? Do they keep their promises? Do they call me back? Or respond to my emails in a timely manner? All of these things are much better things to measure than what somebody lies on a timesheet.

Yep. And ultimately, that really is what’s happening is, you know, somebody is spreading out that time On a timesheet somewhere in the firm.

Absolutely. Borrowing from other jobs or fudging or whatever. I mean, they’re a pack of lies, they’re not accurate, but even besides all those arguments, they’re not the right thing to measure, because somebody can create a million dollars in value with a brilliant idea. What do I put on my time sheet? You know, do I count the time I took a shower this morning and all, I mean, it just gets ludicrous because it’s the wrong measuring stick for value, especially in the knowledge environment.

Absolutely. You know, one of the things I’ve heard you talk about a few times in the subscription pricing mindset is the medical world shift from the concierge and primary care pricing model. Talk a little bit about that because I think it’s a great comparison.

Yeah, I do too. This was the North Star for the book Time’s Up. My North Star for where a CPA should be is what the concierge doctors are doing, what the direct primary care doctors are doing. Now, they’re peas in a pod in the sense that they tend both to be general physicians. The difference between a concierge doc is just, it’s the price point. One’s Ritz Carlton and the other is a Marriott Courtyard. The DPC docs are the, you know, they’re going after the middle class and the lower middle classes. They’re usually between $1-300 a month. Concierge doctors are anywhere from $10,000 a year to $50,000 a year. They go after the top 5% of the income earners. So they’re, they’re catering to CEOs, you know, people that have way more money than time.

And they’re both viable models and they both can teach us a lot. So let’s just focus on the DPC docs. The DPC doc is a GP who, the average GP in the United States has a panel of patients of about 2,400. That’s why you get to spend five minutes with your doctor, because he has to see, or she has to see 50 or 60 patients a day. And they’re one, you know, from one room to the other. And they only get paid because they take insurance, whether it’s Medicare or private insurance, they only get paid when they do something to you. They’re in a fee for service treadmill. They don’t get paid for consultations. They don’t get paid for FaceTiming or texting you or emailing you. That’s why they always tell you to come in, because they’re only going to get paid when there’s a consultation, even after COVID, before COVID, didn’t matter. So they have 2,400 patients.

Now, a DPC doc will limit themselves to somewhere between 500 and 600. So they’re running at 25 percent capacity.

Wow.

But you can spend the average appointment time with a DPC doctor is over an hour. And their whole mindset is yes, they’re gonna cure you when you come in with a presenting problem. They’ll fix it. Their real goal is to keep you healthy.

Which is a complete opposite mindset from the traditional medical world.

Totally. Absolutely.

We can probably run down this rabbit trail for a while. But I remember listening to an audio book my wife and I were listening to on a drive, and it was a doctor that left the profession and is now focused more on holistic medicine. And his comment was, I left the profession because the profession has one goal in mind. Keep you alive as long as possible, period. It’s not about prevention. It’s not about getting you well. Unless you have a direct, his words, a direct primary care physician, who is going to spend his time helping you not just get better, but stay better.

And when I heard that, I thought back to a couple of podcasts I had heard you on and a speech that I heard you give or a presentation I heard you give using that comparison. And I thought, you know, that’s so true because in the traditional CPA firm world, the focus is, let me just get this task out the door. Whether it’s your taxes, your books, whatever it may be, it’s a task driven thing versus let’s sit down and let’s talk about your business. And that conversation may be 30% numbers, accounting related. It may be another percentage about people, it may be another percentage about, you know, challenges you’re facing and how you’re balancing your time at work and home, but you’re getting more entrenched in the organization, and becoming more valuable and where you can give more advice other than, hey, let me tell you what the bottom line of your net income on your profit and loss statement look like.

Right. Yeah. And that’s exactly where we need to go. You know, my favorite definition of what it means to be a professional comes from Michael Hammer. And he said a professional is someone who is responsible for achieving a result rather than performing a task. If we want a task done, I’ll hire a day laborer, you know, clean my gutters, walk my dog. But if I go to a professional, an eye doctor, a doctor, a CPA, a lawyer, I’m looking to achieve a result. And that professional is responsible for achieving that result, not performing the task. And my argument against the billable hour is it atomizes everything into a six minute task. And then we think, well, we did these 22 tasks, so we’re done with this job or we’re done with this client. It’s like, no, what about the result?

You know, you can do all the tasks on the checklist or whatever, but you may not achieve the result that the client was seeking. You probably didn’t even know the client had a result in mind unless you had a conversation with them. And so I actually think the billable hour is unprofessional. Because it takes our eye off the result and the result is either to be healthier, wealthier, or wiser. And that’s why the professions that do that, that make people healthier, wealthier, and wiser are so well poised to do the subscription model and do what the DPC docs are doing.

You know, It’s amazing to me how many younger people, regardless of industry, get that. As I mentioned, we just recently moved into a new house, and so there’s some things that I have that, that we need to get done now that it, you know, trees are blooming, grass is turning green, there’s some things that we need to get done on the outside of our five acres. I talked to a concrete guy the other day about pouring a slab for a metal building I need to build. Young kid, 24 years old, he’s the only guy that I talked to that did not say something to the effect, well, it’s going to take me X amount of hours, so my hourly rate is X and my products cost is Y, so it’s going to cost you about, A to B for me to build this.

This kid came in, looked at it. First of all, he’s also the only one that came to my house to look at it. Everybody else did it over the phone or an email. This kid comes up, 24 years old, looks around, takes a couple of measurements, figures on his phone, a couple of things, looks at me and says $8,000. And I said, okay, how did you come up with that? Well, I looked at it and I figured it’s going to take us about this long to get it done. But I mean, I can give you an hourly rate or you can just know that whether it takes me one day or five days, it’s going to be $8,000. Okay!

Right. And see, this is the great distinction that project management makes between estimated effort versus duration. When your dad looked at the Chilton’s thing and said, oh, this tranny rebuild is, you know, 20 hours or whatever, that’s estimated effort. But what the customer cares about is the duration. When can I walk into it? When can I start using it?

Yes!

And that’s what project managers are worried about. If all you’re doing is looking at a timesheet to figure out your workflow, it’s like timing your cookies with your smoke alarm. I mean, by the time you see something on the timesheet, it’s by definition, no longer manageable. It’s a sunk cost at that point. And that’s not what the customer cares about. They care about when can I use the building? When’s it go live? You know? And we don’t measure that. We measure the effort, not the duration. It’s crazy.

That’s a great distinction because, you know, again, in this scenario with the concrete guy, my biggest concern is I need to know when you’re gonna be done because I need to schedule some guys that are gonna build a metal building workshop for me. So, All I really care about, I don’t care if it takes you two days or five days or two hours to get it done. When will it be done? And when can I get these guys standing on the concrete building this? Like you said, that’s what matters to me, the end result.

Right. And John, it’s funny because, you know, I’ve hired guys too, to do stuff around my house, and the other thing that I find amazing about the home improvement or whatever business, handyman, you know, contractor, none of them give you options. If that guy would have given you three different options for three different types of building, we can have this material or we could do it this way and this might last longer or be more weatherproof or more soundproof, you know, whatever it is you’re looking for. I mean, if they, if you would have given you options, my guess is you wouldn’t have bought the cheapest.

Mmm hmm. You’re absolutely right.

And none of them do that because they’re so T&M driven.

When you look at the space that we’re in now in 2024, I’ve got to believe that there’s a few more smiles on your faces, coming away from conversations or lectures or discussions or training, coaching type events that you’re a part of because there’s more people that are getting it. When you think about those people that are getting it, do you see some common themes between firms, organizations, size, mindset? Is there anything that you look at and see a string of commonality?

Right. It’s a great question. And I think about this a lot. There are certain characteristics of firms or it’s really not firms, it’s the people in the firm. We don’t convert firms. We convert minds inside of firms. And sometimes you can’t convert a firm, but you can convert a mind in a firm. And if that person leaves the firm, then they go out and start their own firm and do it the right way. So I’ve always counted conversion of minds, not firms. The pattern of people that get value pricing, first, they have an abundance mentality. They don’t view the world as zero sum. You know, some have to lose for others to win. They don’t have that mentality. They know they’re professionals. They know they bring tremendous value. And so that’s a common characteristic. It’s not age related. I have learned some of the biggest movers of this were older. And the whole thing about, you know, you can’t teach an old dog a new trick. You can.

Now, maybe an old dog is not going to invent a new trick. Innovation tends to be a very young person’s game below 40 on average. And I, we could spend a lot of time on that and that, that really pisses people off when I say that, but it’s so true, that if you look at all the Nobel Prizes, if you look at the average age of the Manhattan project scientists—25. Look at the average age of the founders of this country, you know, all below 30, except Ben Franklin. He’s an outlier. I’ve given that Franklin did amazing things into his 80s and invented all sorts of new things. But he’s almost like the rule, the exception that proves the rule, right? Because he’s so unusual. And so that’s another thing.

The other thing is they realize that there’s a better way to run a practice than billing time and filling out timesheets. And a lot of them just did it because they were fed up or they had a medical crisis that they had to change. They had to work smarter, not harder because their doctor told them that. Otherwise, you’re. You know, you’re not going to be here type of thing. I wish I could point to various things, but it’s just mentality. It’s always been a mindset issue. There’s a great video on this by the way. And you might want to dump this in the show notes called The Backwards Bicycle, if you just Google, this video will come up. It’s about seven minutes and it is the definite perfect explanation of how hard it is to rewire your mind from hourly to a value pricing mindset, and it does a great job explaining how our brains work.

Interesting. You know, you talk about how that person that gets a new idea leaves and starts their own firm. We’ve got a client here in the Dallas area that we work with that left a Big Four firm with the intent of a lot of long nights, single guy at the time, a lot of time at 11 o’clock, midnight at the bar, having a beer with buddies, all kind of saying the same thing. There’s got to be a better way. He left to start his better way, and what was funny is he said he kind of woke up two to three years into starting his own firm, and realized all he had done was build a smaller firm that looked like what he left. All the ideas he had got put on a back burner because “I gotta make money, and so I just started doing it the way I knew how to do it, and we’re working with clients that are a pain in the butt, we’re billing by the hour. I’m killing myself, my staff is overworked. We’re over capacity.” All of the things that are traditional within a firm.

And kudos to him, he recognized that, drew a line in the sand, and sat down with his team and said, okay, here’s what we’re going to do going into next year, which was going into ’23, coming out of ’22. No more orphan tax clients. We’ve got a client that all we do is their tax return period, the end, a simple 1040, whatever it is, they’re gone. ’23 is the last year we’re touching them. We’re not going to do it. Everybody’s moving to subscription based pricing. If we do your taxes, we do your bookkeeping. If we don’t do your bookkeeping, we don’t do your taxes. So we’re going to touch your books at least quarterly, ideally monthly. Over the course of ’23, they got rid of about 38% of their client base, hired I think three people, grew revenue by 65%.

I wrote the same chapter. I mean, psychologists call it path dependent. You know what you are in the past, you’ll be in the future. And I came out of the Big Eight. And what did I do when I started my firm? I billed by the hour. What did my partner agree with? Well, he was from AA. So he, yeah, we got to keep a timesheet. We billed by the hour. And it’s crazy. And I recognized it really fast that this isn’t the way to success.

The other thing, you know, and this might take us far further afield than you want to go, but it needs to be said. I’m getting tired of hearing the fact that CPAs are burnt out. We’re suffering from burnout, depression, alcoholism, divorce, suicide, all of these things. You hear this in the medical field too, and this is where I learned all this, by the way. It’s not burnout, John. CPAs, type A personalities, they went to school, they worked really hard, top of their class, you know, academic achievement, all of that. It’s not burnout. I think it’s moral injury. We’re not living our purpose. When a doctor takes the oath, the Hippocratic Oath, there is something in one version of it from John Hopkins that says, if I shall fail to live by this oath, may my own health be taken away from me. In other words, if I betray these words, and there’s a great book out there called If I Betray These Words that talks about we’re misdiagnosing. It’s not burnout. It’s moral injury. We’re not doing what we’re designed to do.

If you ask any CPA around the world, why’d you become a CPA? They’ll say to help people. And are you living that purpose? No. Cause I’m filling out a timesheet in six minute increments. And all I’m judged on is how many hours I bill and it, you know, what tasks I accomplish and whether I do it on time or not. My impact on my customers is not being measured at all or even looked at or considered. That’s moral injury. It has nothing to do with burnout.

If I were to go through your new house and change all your light bulbs, screw in new individual light bulbs, and 50 percent of them popped out, you know, blew up, I probably couldn’t blame the light bulb. I blame the electrical system. And the electrical system in our case is our business model that we sell time or fee for service. And that’s, it’s dispiriting. It’s moral injury. That’s what we’re suffering from, not burnout.

Thanks for joining us for part one of John Randolph’s conversation with Ron Baker of VeraSage. Part two will air July 3rd. Don’t miss it—subscribe on your favorite podcasting app and visit CPALifePodcast.com for links and show notes. We’ll see you next time on CPA Life.

Important Links:

VeraSage

Ron Baker on LinkedIn

Ron Baker’s Author Page on Amazon

The Backwards Brain Bicycle

The Trailblazer of Modern Accounting: Ron Baker

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