Ron Replies to Pat Lamb’s Lean Discussion

Pat Lamb posted on Lean Client Service, which inspired me to post a comment.

Then Pat replied in another post.

This led to another post, incorporating several comments from Legal On Ramp’s discussion board.

The debate is critical, and regular readers of VeraSage already know how much ink and mind power we’ve devoted to this topic.

Attacking efficiency is the equivalent of criticizing motherhood and apple pie, so my position is highly contentious. I believe this is good, since we only learn from people we disagree with. And, it illustrates how we have not yet come to grips with the consequences of no longer being an industrial/service economy, but rather a knowledge economy.

In that spirit, I thought it necessary to comment on Pat’s latest post, while expanding the discussion.

Here is my letter to Pat.

Hi Pat,

Fantastic discussion, thanks so much for provoking this much thought on what I consider a critical issue for professional knowledge firms.

We have two problems with this debate. The first is a linguistic issue. We all seem to be using a somewhat different definition of efficiency and effectiveness.

We believe all change is linguistic, so we should agree on terms. For example, you say in your post that I am one of the “leading thinkers on the issue of value billing,” but we at VeraSage don’t use the term “value billing,” since billing is done in arrears, whereas pricing is done up-front, before the work is started. There’s an enormous difference in these two approaches.

We also don’t believe law firms are “professional service firms” but rather “professional knowledge firms (PKFs),” terminology more in line with Peter Drucker’s famous definition of knowledge worker and knowledge economy.

So let me begin by defining how I am using the terms efficiency and effectiveness, which I take from Peter Drucker:

  • Efficiency focuses on doing things right.
  • Effectiveness concentrates on doing the right things.

Now many people argue that both of these are important, and up to a point I agree. However, past some point—which we argue occurs sooner on the graph in a knowledge firm than, say, in a factory—the two become mutually exclusive. I can cite hundreds of examples where a decrease in measured efficiency still leads to an increase in effectiveness.

However, I can’t find many examples of where an increase in efficiency has increased effectiveness (as defined here). I know Fred Bartlit says that “increased efficiency almost always results in increased quality,” but quality is not necessarily effectiveness as I’m using the term here. One could make an incredibly high quality cement life jacket, but it wouldn’t be very effective (this crack was made by Tom Peters with respect to ISO 9000 standards).

Peter Drucker believed that a business wasn’t paid to be efficient; it’s paid to create wealth for customers. A business could be highly efficient at doing the wrong things. Examples abound: buggy whip, dot-matrix printer, slide rule, and typewriter manufacturers, etc, all models of efficiency before they were decimated in a gale of creative destruction by more effective technology.

In fact, a company at the apogee of their measured efficiency is probably in a perilous position, which is why Google allows its professionals to spend one day per week working on projects that excite them. This is not very efficient per your timesheet or billable hours; however it has led to many of Google’s innovations—Gmail, Google Earth, Google Books, etc. Other companies such as 3M and Gore have similar strategies.

This is why Peter Drucker wrote The Effective Executive, and not The Efficient Executive.

But let’s get back to efficiency.

What, Exactly, Is Efficiency?

Efficiency is always a ratio, expressed as the amount of output per unit of input. Mathematically, it seems straightforward, as if there was one widely agreed upon definition of the components of the numerator and denominator. In an intellectual capital economy, however, it is a conundrum.

Take the denominator in the ratio. Which inputs should be included? If we are dealing with wine, we could count the costs of the grapes, the bottles, corks, etc., none of which would help us define—let alone value—the final product. As they say, it is much easier to count the bottles than describe the wine.

If we were dealing with Rembrandt’s efficiency, we could sum up the cost of paint, canvas, brushes, and even the amount of labor hours spent plying his craft. Would there be any relationship to the final value of the output?

We can calculate how many surgeries the cardiologist performs in a given number of hours, but it doesn’t tell us anything about the quality of life for the patient.

Was Einstein efficient? How would you know? Who cares?

Firms have learned costs are easier to compute than value, so they cut the costs in the denominator to improve the efficiency. This is the equivalent of Walt Disney cutting out three of the dwarfs in Snow White and the Seven Dwarfs in order to reduce the inputs, thereby making the resulting ratio look better. Since Snow White contained over 2 million painstakingly crafted drawings, this reduction would have been quite efficient—but hardly effective. The Two Little Pigs probably would have been more efficient, but nowhere near as effective.

The fact of the matter is, we do not know how to measure the efficiency of a knowledge worker. And this is true for a very fundamental reason, which leads to the second problem with this debate: The Grand Fallacy—that is, the idea that there is such a thing as “generic” law firm efficiency.

There’s No Such Thing As Generic “Efficiency”

Efficiency cannot be meaningfully defined without regards to your purpose, desires, and preferences. It cannot simply be reduced to output per man-hour. It is inextricably linked to what people want—and at what cost people are willing to pay.

Consider the example of a hammer in a poor country. It’s likely to drive more nails per year, since it’s most likely shared among more people and sits idle less of the time. But that does not make the poor country more efficient; it just proves that capital tends to be scarcer and more expensive in those countries.

During the Cold War, the old Soviet Union used to boast that the average Soviet box car moved more freight per year than the average American box car. Yet this didn’t prove they were more efficient. On the contrary, it proved that Soviet railroads lacked the abundant capital of the American industry and that Soviet labor had less valuable alternatives to engage in than their American counterparts.

Your automobile is not very efficient, since it’s idle a majority of the time. So what? When you want to go somewhere, it is incredibly effective, since it meets your purposes at a price you’re willing to pay. (I am indebted to Thomas Sowell, and his masterful book, Basic Economics, for these examples).

Princeton economist William J. Baumol asks this thought-provoking question: How would you go about increasing the efficiency of a string quartet playing Beethoven? Would you drop the second violin or ask the musicians to play the piece twice as fast?

Adam Smith explained how the specialization and division of labor were the major causes of productivity increases and the creation of wealth. However, even some of Smith’s insights are not effective in a knowledge environment. Shakespeare could not specialize in writing the verbs while a colleague wrote the nouns of his many works, even though this would, no doubt, increase “efficiency,” at least given the way firms currently measure that statistic.

Judgment vs. Measurement

Efficiency is always a measurement. Effectiveness, on the other hand, is always a judgment, which is far more important in a knowledge environment. Some of the comments on your blog post support this position, especially Fred Bartlit’s.

There is no generic way to “measure” the quality of legal output; it requires a judgment, based on the results it creates. This is one of Drucker’s major insights about the difference between a factory worker and a knowledge worker. If I’m placing tires on an assembly line it is much easier to measure my quality (and defects) than if I’m a lawyer writing a crappy brief, which will only be discovered by a judgment, usually from another lawyer.

I was hospitalized last year. My surgeon ordered a CAT Scan. The procedure was done very efficiently, as measured by outputs and inputs. I was in and out very quickly, comfortable, etc.

However, when my surgeon saw the scan results he “judged” the radiologist screwed up, didn’t scan far enough down my thigh. The measured efficiency could not inform him of this defect—it had to be judged. This defect led to a much longer hospital stay and other serious complications.

The scan was highly efficient, but it was nowhere near being effective.

I’m all for process, and you mention audits. However, judgment is still superior. Take Enron. The auditors followed the “processes” and the “checklists.” What they didn’t do is apply professional judgment by asking “Do these financial statements reflect the underlying economics of this entity?” The result was an efficient audit that was entirely ineffective.

Anthony Kearns makes an excellent point when he says: “In law…it will be difficult if not impossible to determine in advance where efficiency in process can be achieved without unsatisfactory compromises in quality.”

This is another way of stating what economists have known for centuries: there is no generic efficiency without respect to purpose, and what you are willing to pay.

Anthony also makes another excellent point about expertise driving efficiency (I would say it drives effectiveness), and this supports my argument even more.

When we are undergoing education, we aren’t very efficient as measured by a ratio of outputs divided by inputs. New skills take time to learn, and beginners make tons of mistakes. If all we cared about was efficiency we’d never educate our team members. But the only way a knowledge worker can become more effective is through education, so the cost of less efficiency is a price worth paying.

Scott Irwin’s formula is interesting: Effectiveness + Cost Control = Efficiency.

But I reject this, for the many reasons cited above. Too many companies focus on cost control and efficiency at the expense of effectiveness, which I believe is dangerous.

Gordon Bethune, former CEO of Continental Airlines, made this very point in his book, From Worst to First. He said Continental’s management culture was totally focused on driving down cost per passenger mile, by piling more people into the planes like sardines, cutting down beverage sizes, taking out pillows, blankets, and magazines, etc.

He wrote “you can make a pizza so cheap no one wants to eat it, and you can make an airline so crappy nobody wants to fly it.” This cost mentality was precisely why Continental filed bankruptcy twice in one decade before Bethune took over and began to focus on effectiveness.

Efficiency in a law firm, in and of itself, is not a competitive advantage. It’s the equivalent of having restrooms. If your firm isn’t using the latest technological tools that is incredibly inefficient; but if it is using those things, so what? All of your competitors are too.

The differences in firm revenue and profit cannot be explained by efficiency, only effectiveness in customer service, as well as the ability to create, communicate and capture value. Efficiency is a table stake—the minimum you need to be in the game.

Competitive advantage is built on effectiveness, not efficiency.

It’s not very efficient for Nordstrom to have pianos in its stores, as it lowers sales and profit margin per square foot (the efficiency metric for retailers). It is, however, incredibly effective to serenade your employees and customers everyday, creating an ambiance they want to come back for.

The ultimate manifestation of the efficiency mentality was Robert McNamara, president Kennedy’s secretary of defense from 1961 to 1968, thereafter becoming president of The World Bank. McNamara was an accounting instructor at Harvard Business School before World War II, then he served as a specialist in operations research projects with the U.S. government during the war. After the War, he was hired by Henry Ford II—along with the so-called Whiz Kids—to revitalize the sagging profits of the Ford Motor Company.

He brought a mechanistic mind-set to the War in Vietnam, trying to micromanage it by the numbers. He apologized for this ill-conceived strategy in his 1995 autobiography In Retrospect: The Tragedy and Lessons of Vietnam.

Blindly relying on measurements can obscure important realities. The ultimate problem with numbers and measurements is what they don’t tell us, and how they provide a false sense of security—and control—that we know everything that is going on. I think the mentality among many leaders in professional firms is “If we can’t manage it, let’s measure it.”

What is the Purpose of a Law Firm?

What are firms trying to accomplish? What is the goal? Is it simply to crank out more work per labor hour?

If that’s the case, then under the hourly billing model their revenue actually decreases. That seems ludicrous.

Is it to crank out more work per labor hour to increase firm capacity? For what purpose? To add more “F” customers? That, too, doesn’t make much sense.

As Kurt Siemers, CEO of Kennedy and Coe, LLC (a Top 100 accounting firm) says:

And since becoming more efficient is a zero sum game over time, we have been left with working more hours to earn more. The historical business paradigm of our profession found itself on a collision course with our commitment to the well being of our people.

Simply stating that a firm wants to be more efficient is meaningless. They need to define what they are trying to accomplish long before they can begin to consider the best way to achieve their objectives. This is, I believe, precisely what Fred Bartlit is saying, which I agree with wholeheartedly.

The ruthless quest for increased efficiency contains within it a grave moral hazard. It’s encouraging behavior from firm leaders that is driving out creativity, innovation, dynamism, customer service, as well as talent from the professions.

I know you are a big fan of Total Quality Service, Pat. So are we. In fact, I came to Value Pricing through TQS, as the hourly billing method is a lousy customer experience.

The giants in TQS, thinkers such as Karl Albrecht, Stanley Marcus, Walt Disney, J.W. Marriott, among many others, didn’t have much use for efficiency, knowing that dealing with people requires effectiveness. Karl Albrecht criticized TQM, Six Sigma, etc., for this very reason, and thought the mechanistic mentality it fostered killed customer service.

Doing the Right Thing, not Doing Things Right

Forget about efficiency. Worry about effectiveness.

Better still, focus on efficaciousness; meaning having the power to produce a desired effect. This term is used to describe the miraculous power of many drugs since it suggests possession of a special quality or virtue that makes it possible to achieve a result—exactly what we are trying to accomplish in law firms for customers.

In an intellectual capital economy, and within firms, where wealth is created using the power of the mind—as opposed to the brawn of the body—these characteristics better explain the value created by knowledge workers.

Yet all of the so-called “efficiency” metrics and protocols such as Lean and Six Sigma have their origins in the late 19th century time-and-motion studies for manual laborers in factories, not knowledge workers who don’t work to the rhythms and cadences of an assembly line.

Firm leaders need to stop looking at input-output tables based on labor hours. Rather, they should define what their purpose and strategy is so to be different than the competition in order to command premium prices.

I believe lawyers are more artists than technicians. By all means, put processes in place for the low value work that can be streamlined and is repetitive. But when it comes to the thinking, strategy, synthesizing information, and creating results, use your minds, creativity, expertise, wisdom, and judgment.

I can increase an artist’s “efficiency” by providing them with paint-by-the- numbers kits, but it will produce crappy art.

Do I have a higher opinion of lawyers than do those who have commented on this board?

What is Superior to Lean/Six-Sigma?

It’s one thing to light a candle in the darkness and point out flaws in the status quo, a function incredibly valuable if we are to improve our theories.

However, it’s also important to offer an alternative to the present darkness.

A Professional Knowledge Firm is not a factory, which is why I believe Lean and Six Sigma are the wrong talisman. Companies such as Google and Apple don’t use these tools; Southwest Airlines doesn’t even use them.

As a knowledge worker, I have seen far too many firms implement this type of thinking, turning their artists into a caricature of Charlie Chaplain in Modern Times, getting sucked into efficiency metrics, quotas, etc. I believe the price we pay for this is a lack of focus on effectiveness and customer service.

I, for one, don’t want to work in an organization that has a ruthless focus on efficiency. It’s not very inspiring or meaningful.

We offer the following cognitive tools as superior to Lean/Six-Sigma in a Professional Knowledge Firm:

  • Key Predictive Indicators—measuring the success of the law firm the same way the customer does;
  • Before and After Action Reviews—a concept developed by the U.S. Army and one of the most innovative tools that can be used in a PKF.
  • Knowledge Management—knowing what a firm knows so it can be leveraged is one of the most effective ways to create wealth for customers.
  • Project Management—we believe this is a critical skill for all firms, no matter how they price, even if by the hour. PM looks forward, planning capacity, resources, risk, etc. Timesheets look backwards. Timesheets have allowed firms to do a lousy job on PM (not to mention capturing value through more strategic pricing). By the time you see a problem on the timesheet, the milk has been spilled, the damage already done.I have one final question: Is this debate efficient? What are people putting on their timesheets when they participate in these types of Social Media discussions, which are quite time consuming?

    I don’t think this is efficient at all.

    I do, however, find it very effective.

    Thank you, Pat.

Comments

  1. Awesome logic, Ron. Brilliantly put.

    Thanks too for pointing out the almost oxymoronic nature of “value-based billing”. I won’t make that mistake again.

    David

  2. Thanks David. As you know, this is a highly contentious point of view. Who would attack efficiency?

    VeraSage, that’s who.

  3. Ron,
    Thank you for a brilliantly executed argument. I have only a passing interest in the legal profession but a huge interest in effectiveness and efficiency and all that goes with it.
    Until today I had never heard of the VeraSage Institute but the eloquence of your writing will ensure that I visit this site on a regular basis and share your ideas with many people.
    Thank you for raising the bar on clear thinking, debate and excellence in communication.

  4. Thank you Ann, I’ll need all the support I can get on this topic!

  5. Hi Ron
    Thanks for a very interesting and relevant discussion. I would like to add a few comments to prompt further reflection.
    I agree that value pricing is the ultimate objective for Professional Knowledge Providers. As a Kaizen / Lean advisor (consultant) and coach I believe we too are selling our Professional Knowledge ? but also, more importantly – we are selling the creative application of that knowledge to suit each client?s unique situation. Ideally, we should be confident enough to put a price on that value-add before we deliver that value. Unfortunately, it is often the clients who struggle to fully appreciate this concept.
    For the purpose of this discussion I?ll steer clear of the meaning of efficiency vs. effectiveness. It is certainly non-negotiable to always focus on continuing to do the right thing(s) in the first place ? that?s why strategic alignment is so important. Unless that ?right thing? is challenged by a new paradigm … but that is a new discussion altogether.
    Ultimately we should focus on doing ?the right thing(s)? as well as possible. As you pointed out, a good starting point will be to make the low value, repetitive tasks more lean to free up the professionals to focus more on creative thinking.
    In the Lean landscape we try to achieve ?demand pull? and ?uninterrupted flow? of material, information and money. We also refer to the seven or eight types of ?waste? as well as ?over-burdening? and ?unevenness?. From experience, all business processes will include activities, tasks, practices, physical lay-outs, etc. that can be classified as non-value adding. I.e. if the client had a choice they would not want to pay for it.
    For me it goes back to the true spirit of Kaizen (the quest for Continuous Improvement by everyone, every day, everywhere). We can?t say that any process is perfect. We?re certainly not pushing change for the sake of change ? only improvement. Efficiency is only one way to quantify the actual improvement.
    It?s often about doing more or doing it better with the same … not necessarily doing the same with less (typical cost-cutting / one-dimensional efficiency gain thinking).
    Keep on keeping us honest!
    Regards
    Danie

  6. Thank you Ron for the debate…I enjoy reading them…and no I don’t have to put this on my timesheet.

    I found your question at the end funny…”Is this debate efficient?”

    When I was still working for someone else in the IT field I could never understand why the principals and managers were exempted from timesheets.

  7. Thank you Danie, I appreciate your comments. Customers don’t struggle with a fixed price up-front, it’s how they buy everything else. What is more likely is the customer doesn’t see your value clearly enough. VeraSage is dedicated to helping professionals communicate, create and capture value, but to do that you must price up-front.

    I’m not against Kaizen or process, I just believe there are other methods. Long before Lean/Six-Sigma there existed excellent customer service organizations, such as Disney, Nieman-Marcus, Marriott, etc. I reject that Lean is the only way to get there, especially in the knowledge economy.

    Thanks Gerhard, agree that everyone should be exempt from timesheets–talk about waste!

  8. Ron,

    Thanks for the hint to Basic Economics. I’ve listened to it all day yesterday and today, and it’s amazing.

    A very exciting and practical way of presenting a generally dry topic.

    I like the word “efficaciousness” because it refers to the performance capability. And if clients allow this capability to blossom, that is, they make the right investment and provide the best culture and environment to work in, then the synergy of all the people involved in projects can create amazing results.

  9. Hi Tom,

    Yeah, Sowell is a frigging genius! One reviewer said reading Thomas Sowell is like “chewing on nails” because his logic is so penetrating and fierce, not to mention he’s completely politically incorrect.

    Check out any of his other books, they are all excellent. He also has books that are compendiums of his syndicated newspaper column, which is just excellent.
    Ron

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