VeraSage

Why is VeraSage a think tank?

Ron Baker - 05/09/2009

I get asked this question all the time, and I’m afraid I’ve never given a completely satisfactory answer.

We get asked constantly for endorsements, for example, or affiliations to promote various products and services, and I always have to explain we are a think tank and that’s not part of our Purpose.

But a lot of people don’t have much contact with think tanks. I’ll freely admit I’ve been “over-invested” in think tanks for at least twenty years and have learned an enormous amount from all of them, as well as having mentors in nearly all of them.

So I thought I’d share with the VeraSage community the origins of our founding. It dates back to September 4, 1999, in a paper titled “Operation Telescope.”

This was written for Paul Dunn (and Ric Payne), at that time the founders/owners of Results Accountants’ Systems (RAS).

Obviously, the original vision did not come to fruition since Paul Dunn sold his portion of the company in 2001.

But the idea didn’t die, and my colleagues, Dan Morris and Justin Barnett, and I founded VeraSage in 2001.

As an organization, it’s a disembodied entity held together by an idea—that is, to improve the professions.

I recently read the Noble prize winning economist Herbert Simon’s autobiography—Models of My Life—wherein the last page reads:

To make interesting scientific discoveries, you should acquire as many good friends as possible, who are as energetic, intelligent, and knowledgeable as they can be. Form partnerships with them whenever you can. Then sit back and relax. You will find that all the programs you need are stored in your friends, and will execute productively and creatively as long as you don’t interfere too much.

Measured by this standard, VeraSage has certainly met my expectations. I get to work with some of the brightest people I’ve ever met, with the added bonus that they are all good friends.

I’d like to express my deep appreciation and gratitude to everyone of them:

• Justin Barnett
• Dan Morris
• Scott Abbott
• Peter Byers
• Michelle Golden
• Daryl Golemb
• Brendon Harrex
• Paul Kennedy
• Ed Kless
• Chris Marston
• Tim McKey
• Paul O’Byrne (R.I.P.)
• Tim Williams
• Yan Zhu
  

And of course thanks to our community who support us: readers, friends, colleagues, and a myriad of others too numerous to list.

Ask VeraSage: Who is responsible for the message?

Ed Kless - 03/20/2009

Eric Fetterolf wrote to VeraSage with an interesting question:

“Group fed up with baffling government jargon” is an article from Yahoo news.

I’ve heard you encourage people to extend our vocabulary.  Using broader vocabulary encourages readers and listeners to improve their own vocabulary to achieve understanding.  Having stated that, I agree that one should not use language to confuse or obfuscate the intended message. 

In your opinion, who is ultimately accountable for the message: the Speaker or the Listener?

Ron: The speaker is always responsible for the message. But that does not mean that the Listener has no responsibility. In fact, listening is probably the most least used skill of all. Most people are awful listeners. But that said, the onus is still on the speaker to get his point across in a way the listener can grasp. Peter Drucker has written about this very topic, I want to say in his The Effective Executive book, but don’t quote me on that, it might be in another one of his books.

Ed: The creation of the message is clearly the sender and it is the responsibility of the sender to develop to the best of one’s ability a message that one believes will be understood by the listener. The listen can choose to ignore the message regardless of what the sender does. It is mutual, but I would say the focus needs to be on the creation of the message by the sender.

What say the rest of you?

Ask VeraSage: Pricing Litigation Support Services

Ron Baker - 02/20/2009

I received the following questions regarding pricing litigation support services over the prior week.

Mr. Baker.

As a thought-leader in value pricing I was hoping that you could take a few minutes to share your thoughts and comments with me about value pricing in my practice area.

I am located in California and I offer litigation support services to family law attorneys. I am regularly hired by family law attorneys to perform valuations of closely-held and professional service businesses, analyze apportionment of community and separate property claims, perform forensic tracings and complex special accountings, and calculate child and spousal support. Ultimately, these assignments result in me providing expert witness testimony either by written declaration or by oral testimony.

I am writing to ask your opinion about somebody (me) providing the aforementioned litigation support services in a value pricing format.

This is something that I feel confident that I could successfully do from a project management standpoint on my side. However, I am wary of how it would be perceived by the family law attorneys that hire me and the Courts that consider my testimony.

I am curious what your opinion is on whether or not this non-traditional approach to pricing would be either a turn on/off to family law attorneys who only know the billable hour, if as an expert witness I can charge my clients in this manner and avoid be perceived/labeled as a “hired gun,” what potential pitfalls may lie ahead when I am on the stand being cross-examined about my billing practices, and finally how would I market a value pricing approach without offending the bill-by-the-hour attorneys that hire me.

Thank you in advance for your time and comments.

My reply:

Thank you for your email.

My take is you should be able to provide a Value Price for this type of work. If the attorneys ask for “number of hours” simply reply that you don’t do timesheets, but rather agree upon a fair price up-front for value delivered. As long as the price is not “unreasonable” I can’t see why the lawyers or the court would disallow it, especially as it was agreed to up-front. There is nothing more transparent than pricing up-front, despite how proponents of hourly billing twist themselves into pretzels denying.

I would also think the family law attorneys would appreciate the certainty in price; I know the clients would! As for “hired gun,” I think that risk exists just as much with hourly billing as it does for a fixed price.

Perhaps if you offered an “Unconditional Money Back Guarantee” on your service, you’d be in a much stronger position to command a premium price. Note that this is not a guarantee of a specific outcome in the case, only with your service level. For an example of such guarantees from law firms, visit here and here.

I also realize state law varies on this, but if a court has jurisdiction over your fees, it may require billable hours. But again, only if it’s questioned; and as long as your fee is reasonable, you’d be able to submit an estimate of the time you spent extemporaneously.

Another question, this one more specific:

I have a practical question.

Hypothetically let’s assume that a client and I agree on a value price of $20,000 for a particular case.

And let’s further assume that I had a very thorough meeting at the very beginning of the case and we identified four specific items that needed analysis.

Then as I am working through the analysis the case settles.

• Does the client still pay me the full amount even if I have not actually performed all of the analysis?
• Would I price each item separately and collect on a percentage of completion basis?
• Even if priced separately what if I did the work but never presented it?
• Do I renegotiate a final price for what was done and refund the difference?
• Isn’t there an intangible value that I provide just by being in the case? Maybe the work that I did complete was so convincing that opposing counsel chose to settle on the other issues? Should I not be compensated for this intangible value and collect the full amount?
  

Value pricing is something that I really want to put into practice but I am trying to think through as many of the future headaches and initial questions I will face.

Thank you in advance for your help.

Again, my reply:

You’re going to get used to hearing this answer from pricers: “It depends.”

You’ve actually answered your own question through the thought process in your bullet points.

As long as you have an agreement with the client, up-front and BEFORE you begin the work, you can have a clause read any way you want in the event of settlement before the work is done. Depending on the value of that settlement, that will help you set the price.

This is where you have to think like an actuary. What are the odds of a settlement? What are the odds you’ll have to complete all the work scoped? You bet there is substantial value just having you involved, which could lead to a quicker settlement. That value should be reflect in a settlement clause price.

Make sense?

The important lesson is to always comprehend your client’s value drivers, and plan for the contingencies you estimate to have a reasonable chance of happening. Price them in advance, giving your client certainty. You’ll be amazed at the results.

As always, we’d appreciate any feedback and experience of others who have priced these types of services.

Ask VeraSage: Is $250,000 per employee the max a CPA firm can achieve?

Ron Baker - 10/26/2008

I received an incredibly thought-provoking email from Jonathan Iannacone, CPA, who blogs as well.

Ron,

I hope this email is not too presumptuous but I consider you one of the rare thought leaders of public accounting. I subscribe to VeraSage (RSS) and am always happy with the thought provoking discussions that you create.

First a disclaimer: I run a small CPA firm that specializes in outsource CFO services for growing businesses. I do not charge hourly (all FPAs) and I do not use timesheets. In short I am a raving Firm of The Future believer.

I would like your thoughts on a question that continues to bother me regarding the K[ey] P[erformance] I[ndicator] we use at the firm, Revenue per Employee.

Recently a list from Inside Public Accounting (IPA) came out listing the Best of the Best accounting firms for 2008 (top 25 and then next 25 honorable mentions). Using the data from that table, you can crunch the numbers to get partner/staff, rev/partner, and rev/employee results. For me, the Rev/Employee is most important since is let’s me fact check my own firm goals.

Looking at the numbers it made me questions a few things:

1. Is there a terminal velocity for Revenue/Employee for CPA firms? Data seems to suggest that whether your $6M or $600M, California or Arkansas, that $200K per employee is pretty much what the best firms do.
2. Timesheets or no timesheets? Does the admission of a terminal velocity render the argument meaningless because at the end of the day it is whatever the market will bear and this list pretty much tells us what that number is? In other words, are there “no timesheet” and “timesheet” firms side by side in this list that scale in the very same way and limit out at the same point?
3. How can we rethink the PKF to escape these constraints. Is there a way to “productize” and package it in a way that makes it infinitely more scalable (Turbo-tax and QuickBooks seem to point to yes).
   

I would love to have your input as to what the numbers are telling you and how you would then go about moving and addressing the questions that inevitably arise.

Thanks in advance for any time and knowledge share.

Sincerely,
Jonathan

Jonathan attached an Excel spreadsheet that crunched the numbers from the IPA article, computing revenue per partner, revenue per team member, and revenue per all employees.

The highest revenue per all team members was from Gerson Preston Robinson & Co., of Miami Beach, FL, at $250,685.

The lowest was Novogradac & Company of San Francisco, CA, at $118,092.

Jonathan asks difficult questions, ones we around VeraSage have discussed for years.

The first issue you confront when looking at studies like this is to realize that these firms are pricing by the hour, which is a self-imposed ceiling on any organization’s income potential.

The Firm of the Past

As my colleague Tim Williams says—with a little exaggeration, but you get the point—if you sell time, and want to make a million more dollars, you have to charge a million more hours.

Not a very effective lever for creating wealth. This is what we call The Firm of the Past, and it’s theory is as follows:

Revenue = People Power x Efficiency x Hourly Rate

All of the firms in the IPA report have, in effect, the above theory as their talisman. I detail the problems with this theory in my recent Journal of Accountancy article.

This is why we believe a new model is needed among Professional Knowledge Firms (PKFs) that leverages the real source of wealth in our knowledge economy: Intellectual Capital (IC).

The Firm of the Future

Hence, our New Practice Equation, or what we call The Firm of the Future:

Profitability = Intellectual Capital x Effectiveness x Value Price

This enables a PKF to leverage its IC in a myriad of ways, rather than relying on the head count of billable hours.

Jonathan’s second question is an excellent one. All of the firms in the IPA report use timesheets, and price by the hour. So we don’t have a controlled experiment within those firms where we are able to study the differences in results.

The best we can do is look at the firms we know that have trashed timesheets and implemented Value Pricing. These firms are, of course, much smaller than those in the IPA report.

When you run those numbers, you find pretty much the same results—that is, not much over $200,000-$250,000 per employee.

Though we do have some firms that top over $300,000 per employee, mostly sole proprietors, which tend to be the most profitable firms on the planet.

Eventually, we will have Top 100 firms whose performance we’ll be able to compare to timesheet firms, but I don’t expect radically different results.

Keep in mind that we are not advocating eliminating timesheets so that firms will be wildly more profitable. We are advocating their elimination because we think they are demoralizing to knowledge workers, along with measuring exactly the wrong the things.

If they made no difference in the profitability of firms, wedd still rally for their elimination.

To Jonathan’s third question about re-thinking the PKF model to escape these constraints, that is exactly what our New Practice Equation is designed to do.

I think you are right on about “productizing” PKFs intellectual capital so they can generate what we call “sleep revenue"—money you earn while in bed. You can’t do that if you’re selling hours.

We have seen some innovative advertising agencies doing exactly this. They are creating their own portfolios of IC, thereby escaping the constraints of selling time.

Among our CPA Trailblazers, what we are seeing is more investment into their “invisible balance sheet.” O’Byrne & Kennedy (OBK), in Great Britain, for instance, has created a knowledge bank wherein it captures its IC so it can leverage it across more customers.

In the long-run, this will make OBK more valuable, with a higher resale value, since it’s not dependent on the IC in the heads of its owners.

But this is a long-term strategy and it will not show up in the revenue per employee calculation anytime soon.

Looking at these revenue per employee numbers also teaches that there are no economies of scale in a PKF. So firms that are merging as a source of growth are not getting any great gains in that area.

PKFs are incredibly labor intensive, and until the business model changes from selling time to selling IC, I don’t think you will see great movement in these numbers—regardless of whether timesheets are kept or trashed.

One more point is worth mentioning. Value Pricing will, inevitably, help push up the revenue per employee numbers, while allowing the firms to do so with fewer customers.

This is a change from economies of scale to economies of scope. Fewer customers equates to more profitability.

But Value Pricing is limited to the value firms create. If all they want to do is play financial historians by offering attest and low-level compliance work, then unless they innovate new product and services to climb up the value curve, they are going to struggle to break the $300K barrier, let alone any higher.

Another number I would love to see calculated for these firms is revenue per customer, which would shed some light on these firms’ value propositions.

In any event, this is not meant to be the final chapter on this topic. It’s precisely this ceiling that inspired Paul Dunn and I to write The Firm of the Future.

How long it takes for the New Practice Equation to diffuse throughout the profession, let alone impact on these calculations, is anyone’s guess. Mine is past my lifetime.

[I will have a future post on this very topic of the time it takes for new theories to diffuse within professions, in the form of a book review. The book I just finished has literally blown my mind, and has made me far more pessimistic regarding the ability of firms to change from selling time to selling IC. Stay tuned].

As always, I welcome any and all comments from our Fellows, Trailblazers, and readers on this very thought-provoking analysis from Jonathan, and the questions he raises.

Ask VeraSage: Why Carthage must be destroyed?

Ron Baker - 10/23/2008

I received an email yesterday challenging me on why I am so adamant about ridding the Professional Knowledge Firm (PKF) of timesheets. At the request of the author, I am not disclosing his name, but I thought his questions were worthy of a response.

This is an excellent example of why the timesheet mentality is such a cancer in the PKF world. It does, indeed, keep professionals mired in the mentality they sell time. I don’t think Bill Gates thinks in terms of $300 per hour.

I have indented my responses to the original email below.

Ron,

Reading your books and the site materials I share your confidence that value-based pricing is the right thing for service selling. I feel, though, that your obsession to wipe out timesheets is akin ”delenda est Carthago” motto.

Maybe the evil is not in time-based pricing itself but in its mighty acceptance which obscures the principle of value-based pricing making it the ultimate end instead of a means.

Indeed, you’re fighting cost-based approach but what if one uses time as a driver of value? Airlines or tailors don’t charge for time they spent because it’s irrelevant. The scope is clear and predefined so the customer doesn’t care how much time it would take or what internal cost would accrue. In the scope-defined engagements it makes sense but I have two examples where I’m struggling to justify a Fixed Price Agreement (FPA).

I don’t understand how you can reconcile the subjective theory of value while asking “but what if one uses time as a driver of value?” That’s the whole point. Time is not value. You have simply asked if the labor theory of value isn’t true. It’s not true, it was refuted in 1871.

Time spent in Professional Knowledge Firms is just as irrelevant as with airlines and tailors. It’s not because they have a more defined scope. It’s because the labor theory of value is false across all human behavior.

I’m a “trusted adviser” and sell my brain-time to the customer via meeting or calls attendance. Say, I have a retainer to spend 1 day a week with him and we sign an FPA for the advisory service for $2400/week (read, 8 hours/day). Now the customer wants to change the scope to 2 days/week. What should I charge him? Something like $4800, right?

It’s logical, clear, and simple. If the customer gives me some unusual “homework” and occasionally I need to spend between half to 2 days additionally on her projects how should we agree on that? Regardless whether we shape it as a change order or a new FPA (taking into account the average extended time) the time will be the driver for the calculation. I’m not saying the customer buys my time—she buys my value—my advisory service, measured via the time we spent. I’m capable of charging $300/hour not because I’m a commodity but certainly because I’m differentiated and the customer recognizes it. We use a Timesheet here just as a measure of the scope and due to the lack of any project-finite scope. I see no other way to measure my services but to multiply the time I spend servicing her on the value the customer perceives to get from the service.

Again, you are not selling your “brain-time” since that is an input. What if you spend a long time thinking but creating no results for your customer? What you are selling is knowledge that creates wealth for your customer.

In your example of $2400 to $4800, you state the customer is not buying your time, but rather your value. But how? You priced this based on time, and that’s not value. What if you come up with a million dollar idea in an hour in that marginal second day? Under your method, it’s worth the same $300 per hour as an hour in the first day. This is suboptimal pricing that has no relationship to your value. The fact that it’s “logical, clear, and simple” does not mean it comports to reality—the subjective theory of value.

You’re still locked into the $300 hourly rate mentality, which demonstrates you are still selling time. This is the exact problem with the timesheet. It’s keeping you mired in the mentality that you sell time.

You ask how you should price another half or 2 additional days, and I would say up-front, before you do the work. Value is subjective, and contextual. It all depends on what you are doing.

You then say that the timesheet is used “just as a measure of the scope and due to the lack of any project-finite scope.” This is why you are still selling time, and not Value Pricing. Timesheets are backward looking, whereas project management, which always defines a scope no matter how limited it may be, projects forward.

You say you see no other way to measure your services, but there are, indeed, other ways to value your services when there is no project-finite scope. We’ve discussed this at length elsewhere. You are letting a problem kill an opportunity to add value to your customers. As a result, you are sub-optimally pricing yourself by the hour. Some would argue—I being chief among them—that this is the result of your timesheet.

Another example is about a typical project in high-tech consulting, solution integration. Timesheets makes life easier when we do have a project scope but the customer has to develop (supply, prepare, deliver) additional tasks my execution is dependent on which. If the dependency is very tight then often times I won’t be able to progress without customer’s delivery. Another pitfall is just so many unexpected things that may happen (which, honestly, may happen with FPA too). So the whole project becomes a huge change order. In that case timesheet becomes a good protection for me since the customer knows that his inefficiency really costs him and I’m not its hostage. So should I drop such customers or just use timesheet as a shield against his inefficiency?

No, you should quote a price for a defined scope up-front, with a covenant that the customer is responsible for providing certain tasks by a deadline. If they fail to deliver, you have a Change Order. Keeping your customer worried about the time you spend is exactly the wrong thing to have them focus on. It’s not a shield to protect you, it’s a shotgun pointed at their head.

You then say that so many unexpected things can happen that the whole project becomes a huge change order. That’s usually the result of very poor planning and project management. It may also indicate incompetence. Face it, if things are that out of control, why are you doing the project in the first place?

But even allowing for your logic, so what? My insurance company provides me earthquake insurance, yet they don’t know every contingency, nor do they even know what their costs are going to be. They still give me a fixed price because I, like all customers, demand it. No one would buy insurance being priced on a time & materials basis.

Your timesheet is preventing you from being a better project manager.

The last reason for timesheet is it’s much more accepted (I guess you heard this one many times) in the industry, customers know how to measure and value my service, and I’m protected against inefficiency or unexpected things. On the other hand, when the scope is concrete and I can trust the customer I’m all for using FPAs (and surely the time then is not the primary driver but the value the customer gets is).

Again, so what? Everyone used to think the world was flat, that didn’t make it right. Customers accept the hourly rate, but they don’t like it. Who wants uncertainty in the price of what they buy? You are way too focused on the internal machinations of your business. This is hindering you from focusing on external value.

Actually I’m negotiating now an offer to join a practice and I was re-reading your books thinking, maybe, to influence my new partners to switch to FPAs. The above is a result of “critical thinking” where playing a devil advocate I wanted to reveal FPA weaknesses and exceptions.

We love critical thinking. We love the fact that you are wrestling with this issue. We love it when people ask “when won’t this theory work?,” since that is how you falsify a theory and come up with better ones.

Critical thinking also means looking at empirical evidence, and the fact is we have over 600 firms that have trashed timesheets. They have solved every one of the problems you point out. You have added nothing new here. That’s not to belittle you, that’s just to say we’ve overcome these hurdles. Read our Trailblazers section for examples of IT firms that have made the transition. Also, read this post that provides additional resources broken down by category of things you have to do to implement Value Pricing and trash timesheets.

I think that the advantage of FPAs is in the value-based approach but must I dig up timesheet completely to sell value? I think I can sell value and still use timesheet for certain cases.

Yes, I believe you must ditch timesheet in order to become better at pricing. Your email is even an illustration of why this is so.

I used to not believe this. I used to say, “Keep your timesheet, but use them as they were originally intended, as a cost accounting tool only, but price on value.” I no longer say this, because empirical evidence has changed my mind.

The best pricers across all PKF sectors—from accounting and law, to advertising and IT firms—all have one thing in common. None of them maintains timesheet.

I used to believe this is because they became so good at pricing, timesheets became superfluous. But I now believe that they became good at pricing precisely because they got rid of the timesheet, which forced them out of the “we sell hours” mentality and made them obsessed with value.

We are very reluctant at VeraSage to state a causal relationship. Too many confuse causation with correlation, as if to say wet streets cause rain.

But here is where I will state a causal relationship emphatically: If you want to become a better pricer, you have to trash timesheets. You have to do other things as well (project management, KPIs, AARs, leadership, etc.), but there’s no doubt in my mind, if you are serious about creating and capturing value, the timesheet must be buried.

To borrow a phrase: Ceterum censeo Carthaginem esse delendam.

An LSD (Low Satisfaction Day)

Ed Kless - 10/13/2008

We often talk at VeraSage about our HSD (High Satisfaction Days), however, I thought it would be fair to post an example of the reverse.

Last week I received this email from someone who attended my workshop on consulting theory. (The firm name has been redacted to protect the guilty.)

What I realize is that project management is really simple but it requires a whole new way of doing things.

Everything here at ZYX firm is so very complex and it makes it really difficult to do a good job for the customer. Most of the problems can be pointed to the billable hour and staff moral is so low that hardly anyone gives fig about the outcome.

Of course the fundamental issue is with the management team revolving around control and the misuse of power. It will take a miracle to see some changes around here.

Clearly, this person will be leaving this firm soon, and that is a good thing. What is sad is that there are some many people out their who continue to labor in firms mired in the muck of the billable hour. If you are one of them do something today by planning your escape. You are not a slave! Sign the Declaration today! Or, post an anonymous comment in this space declaring your own emancipation.

Ask VerasSage: All About T & A

Ron Baker - 07/29/2008

Excuse the salacious title, it’s not what you think. This past week I received two more emails with questions about timesheets, so All About T[imesheets] & A[nswers] seemed like a catchy title we could remember and refer back to often.

We have a lot of excellent resources on this issue throughout this Web site, so I thought it might be helpful to summarize our best ones in a single post, as well as answering the two emails.

There’s no shortcut through this topic, which is precisely why most firms haven’t ditched their timesheets yet. It requires that you take the time to read, think, innovate, and creatively apply the replacements for timesheets.

There’s nothing easy about any of this folks. We are very up-front about the commitment and courage it takes to make this change. If it were easy, more firms would have done it by now. But can you name anything worthwhile that is easy?

Let’s start with the two emails I received, because the first one asks a question that we have not dealt with as of yet. It comes from Carol, a CFO in an advertising agency:

Hello Ron,

You and I have met a couple different times over the last few years at 4A’s seminars. I’ve always been intrigued and inspired by what you have to say and try to implement a value mindset in our estimating and billing practices.

The one area that has always been a hard pill to swallow has been the ‘no timesheet’ issue. Not only does this practice allow for us to gage how long it takes to get something done, it allows us to predict staffing needs, inefficiencies, and most important for the purpose of my reaching out to you now, it allows us to record a WIP accrual every month of time incurred, not yet billed = revenue earned. The majority of our projects are just that, projects, rather than monthly ‘retainers’ with a fixed fee.

This may be a very naïve question, but if you could shed some light on it, it may be a life-changing event at this agency. The question is: If we don’t have reports that tell us how many hours have been worked on any given job so we know what to accrue for, (because we’ve abandoned timesheet entry) how would we determine the revenue accrual each month? Any alternative we seem to come up with only creates much more work for the finance team and seems to produce very guesstimated numbers at best.

So there is my quandary. Or at least one of them, I should say. Is there any knowledge you could share with me that might point me in the right direction and further my cause down the road to total Value compensation?

I so look forward to hearing from you and thank you for your time.

All the best,
Carol

Most of these questions, especially regarding forecasting “staffing” needs and “inefficiencies” are answered in the resources below.

The question we haven’t dealt with is how to book revenue without timesheets. As you know, timesheets are used for WIP [Work In Progress] reports, which is how most firms accrue their revenue.

Of course, do we really think that just because a firm “spends time” working on a project that it has earned revenue? Is the timesheet really the best measure of that process?

A better method is the percentage of completion accounting method. If a project can be broken down into milestones, you can then estimate what percentage of the job is completed at the end of any one accounting period. Rather than being based on time, you are basing it on the actual work that needs to be performed.

I’d love to hear how some of our Trailblazers are handling this, especially firms like Mark Bailey’s that do audits that may overlap between two years.

In any event, we at VeraSage are far more concerned with establishing an external price—commensurate with value. How you account for that internally, I believe, can be established utilizing good accounting principles on a consistent basis.

The second email is from Toby, a CFO for an engineering firm:

Ron,

I have been reading your pamphlets and find them to provide an excellent solution for changing the way Professional Service firms operate.

I have some questions:

I am the CFO at an Engineering Service firm. In our case many of the “jobs” are unique to each client. Do you have any examples of how this type of firm can apply the value pricing concept? Would we still use Fixed Price Agreements?

Also, I noticed that a “calculated price” based on “billable” rate assumptions was used by several of the examples you cite. It seems there can still be a value in keeping a billable rate handy. Am I missing something? Would it be reasonable to use the “billable” rate per person in arriving at the FPA amount?

Finally, wouldn’t we still need to report time (at actual paid rates) in order to measure the profitability of each client? (We would not be using a billable rate.) This would allow us to have information for use in renewal of the FPA, or give information as we price FPAs for new clients.

Any guidance would be helpful.

Thanks in advance.

Toby

Here’s my reply, which has been expanded upon for purposes of this post:

Dear Toby,

Value Pricing is ideal for unique jobs, since value is subjective. A pricer’s dream is to charge a price commensurate with each customer’s perception and actual value received—like at an auction.

It’s known as first-degree price discrimination, which is very difficult for most businesses to implement, but Professional Knowledge Firms can get closer to it since they meet with customer individually, especially since so many projects are customized and unique for each customer.

Advertising agencies are very similar to engineering firms, since their jobs are also very unique to each customer, and we have had ad agencies that have adopted Value Pricing (VP) and ditched timesheets. Our recent Trailblazer ad agency Fletcher Martin is one example.

See our Trailblazers section of the Web site for case studies from firms across the Professional Knowledge Firm (PKF) sector who have made the transition.

We don’t advocate a “calculated price” based on a billable rate, since that is cost-plus pricing. Of course, many people will compare a value price to a “billable” rate, just to prove that VP is higher. Once you do this a few times, you realize time tracking is superfluous.

There is no value in keeping a billable rate handy, since it’s an arbitrary rate. This is not to say you don’t do cost accounting. But the important point is to do the cost accounting BEFORE you do the project, not during or after. Toyota does this quite successfully, it’s know price-led costing.

It’s also important to remember that a “billable rate” is not cost accounting, since it includes a profit margin. No cost accounting theory that I know of allocates desired profit, just costs. To be true cost accounting, you must remove the built-in profit from the hourly rate.

As to measuring profitability of each client, there are other ways to do this without timesheets. After Action Reviews, and project management (which you engineers are excellent at, far better than the average CPA or attorney), are two such methods.

What Replaces Timesheets?

Here is a list of what replaces timesheets, based upon the empirical evidence from firms that have made the transition:

• Price-led costing
• Project management
• Key Predictive (not performance) Indicators
• After Action Reviews
• Before Action Reviews
• Fixed Price Agreements, Change Orders
• Chief Value Officer and/or a Pricing Cartel
  

The following is a partial list of resources dealing with each of the above.

Price-Led Costing

Cost-plus Pricing: The Democracy of the Dead.

How Much Are You Leaving on the Table Because of Mediocre Pricing?

Sellers Change Pricing Strategies, Not Buyers.

Hourly Billing is the Opium of the Profession.

My ACCA book, Burying the Billable Hour, in pdf.

My The Firm of the Future and Pricing on Purpose books.

Project Management

Our resident expert on Project Management is Ed Kless, who has written, and inspired, many brilliant posts on this topic. My favorites are:

The Triangle of Truth.

Elements of a Scope Document.

Elements of a Change Request.

A Critique of Project Management: A Means to Efficiency.

The difference between goals and objectives.

Defining the Word “Project.”

Ask VeraSage: Timesheets and resource planning.

How should professionals scope complex jobs, inspired by Ed and Chris Marston of Exemplar Law Partners. 

Key Predictive (not performance) Indicators

No Timesheets vs. Utopia.

He Who Says “A” Must Say “B.”

No Timesheets?  Is it Possible?

Ask VeraSage: How do you measure client profitability and employee productivity?

Ask VeraSage: Why get rid of timesheets?

Why we don’t need consultants.

Timesheets are Training Wheels.

A Firm with No Timesheet: O’Byrne and Kennedy LLP. A case study by VeraSage Senior Fellow Paul O’Byrne (one of the few things from him on this blog, be sure to read it!).

An Essay on Timesheets, by Paul Kennedy. This is one of the best explorations of this topic ever written. A must read.

The Yank Strikes Back.

My ACCA book, Trashing the Timesheet, in pdf.

My The Firm of the Future and Measure What Matters to Customers: Using Key Predictive Indicators, books.

After Action Reviews and Before Action Reviews

After Action Review—The Army Way. This post includes an excerpt from a US Army manual on how they conduct AARs. Highly recommended.

My books, The Firm of the Future; Pricing on Purpose; Measure What Matters to Customers; and Mind Over Matter all deal with After Action Reviews and Before Action Reviews are dealt with in Mind Over Matter.

Fixed Price Agreements and Change Orders

Why Your Firm Needs to Offer Fixed Prices.

Sample FPA and Change Order documents and other resources here.

Ask VeraSage: Fixed Price Agreements and Engagement Letters.

A Blinding Flash of the Obvious, which contains an example of a price menu from an Australian Trailblazer accounting firm.

If You Don’t Discuss Value, Expect to Discuss Hours.

Utilizing Change Orders in Your Firm.

My books cited above, including Burying the Billable Hour contain sample Fixed Price Agreements and Change Orders.

Also, my Professional’s Guide to Value Pricing, Sixth Edition (out of print), can be partially accessed from Google Books.

Chief Value Officer/Pricing Cartel

Your Firm Should Establish a Pricing Cartel.

Who’s in Charge of Value in Your Firm?

Ask VeraSage: Creating a Pricing Cartel.

Ask VeraSage: How does a firm implement Value Pricing?

Ed Kless’ Cosmo Quiz to determine if your firm is truly Value Pricing.

My book, Pricing on Purpose, also explores pricing cartels and the successful characteristics of a CVO.

If this is so rational, why haven’t more firms done it?

This is a great question, one which we at VeraSage have spent a lot of time trying to answer and understand. Here are some thoughts on why more firms haven’t trashed timesheets.

The Diffusion of a New Idea.

Old Dogs Don’t Create New Tricks.

The Answer to How Is Yes

We believe if you understand “why” to do something, the “how” becomes much easier—merely the plumbing. Since there’s no way to implement a bad idea, the “why” is critical.

Read Peter Block’s The Answer to How Is Yes for why this is so.

I know, this is overwhelming. But think of it this way: All you have to do is read it and implement it. We’ve done most of the hard thinking for you.

I will leave you with this analogy. Trashing the timesheet is a true revolution, perhaps not as dramatic as the signing of the Declaration of Independence, but a difficult objective to achieve across all PKF sectors nonetheless.

In his book, Peter Block describes the six questions that are always asked when people are confronted with significant change:

1. How do you do it?
2. How long will it take?
3. How much does it cost?
4. How do you get those [other] people to change? [we get this all the time: I’m all for this, but my partner(s) won’t go for it].
5. How do we measure it?
6. How have other people done it successfully?
   

How would Thomas Jefferson have answered these six questions?

1. I don’t know.
2. I don’t know.
3. Possibly your life.
4. I don’t know.
5. I don’t think you can measure Life, Liberty, and the Pursuit of Happiness.
6. No country has ever done it successfully the way we are proposing. Sign here.
   

Block suggests two better starting questions:

1. What [type of future] do we want to create together?
2. What is the price [we are] willing to pay to achieve it?
   

It is simply impossible to know how to do something until you attempt it. It is the leap, not the look, that generates the indispensable understanding and the necessary knowledge to generate wealth.

I hope you find this list useful, refer to it often, share it with others and most importantly, implement the ideas as hundreds of other firms are doing.

Along the way, keep us posted on your progress.

I hope to see you in our Trailblazer section.

Ask VeraSage: Designing team and partner compensation without timesheets

Ron Baker - 07/06/2008

We are constantly asked how partner and team member compensation should be handled in the absence of timesheets. This is always a difficult question since there is no easy answer to this even when timesheets are present.

Here’s an email I received from Patty, a fellow CPA, on July 2, 2008:

Hi Ron,

I’ve heard you speak a year ago at the AICPA PCPS conference and have read your book Professional’s Guide to Value Pricing.  Our firm adopted fixed price agreements about 8 years ago and have been very successful as a result.  Our clients appreciate the fixed fee and we have billed much more than we ever would have if charging hourly.

We have embraced your nontraditional view of professional firms, and hope to discontinue timesheets eventually.  Presently, we are redesigning our partner & team compensation system.  We are struggling with this since most of the models we have found are based, at least in part, on the chargeable hours, realization rates, etc. from the time & billing system.  We want to design a compensation system that will be useful even after we discontinue time sheets.  Hopefully we can find a hybrid compensation system that we can adopt.  We want to keep it simple.

Do you have any advice for us?  We’ve spoken to a few consultants that design partner compensation systems but they are more of the traditional firm model.  I would appreciate any referrals to consultants, seminars, or books that could assist us.

I have purchased The Firm of the Future and hope to read it soon, maybe it can provide some guidance. 

Thanks,

Patty

Thank you for the question Patty. I would first say to avoid consultants since all they are going to be able to do is to show you what other firms of the past have/are doing, not exactly enlightening when you’re blazing a trail.

I also think what you said is quite wise:  “We want to keep it simple.” Indeed.

In that spirit, for partner compensation, how about replacing charge hours with revenue? Or, if you have some partners who are more admin or rainmaking, than value-added or revenue traced to rainmaking.

I’ve never seen two partner comp models that are the same; each firm must fit the model to their purpose and strategy. The two extremes seem to be eat-what-you-kill and perfect egalitarianism. What I will tell you is that more and more firms are figuring out that having an objective formula, with no subjective judgment, is crazy. Life is subjective, so is partner performance, and can’t be reduced to one number.

I should also state that VeraSage is no fan of the partnership model, since it’s a consensus model not a leadership model. We’d prefer a more corporate governance and compensation structure. In that vein, Procter & Gamble doesn’t trace revenue to each employee. Don’t we all work for the same firm? Why trace revenue to particular people, it creates silos, hoarding work and customers.

As for team member compensation, what we see in Firms of the Future is a base salary, a profit bonus pool, and a discretionary bonus pool for individual team members who contribute value above the call of duty. This does not always just relate to customer work. O’Byrne and Kennedy, for example, rewards team members for making contributions to the firms knowledge bank.

Notwithstanding what I said above, if you want to trace revenue per person and can’t figure out how to do it in the absence of timesheets, here’s what some firms do:  throw the entire team responsible for the customer work in a room and let them allocate it. You’ll be amazed how fair they’ll be based on merit, not to mention hold each other accountable for results.

You may also find these two prior posts under Ask VeraSage quite helpful:  December 31, 2006 and January 1, 2007. Be sure to read all the comments as well.

Finally, I’m going to ask the community to chime in with their advice and experience. I know some of our Trailblazer firms are doing some innovative things in this area.

I hope that helps Patty. Keep us posted on your progress—I can’t wait for you to become one of our Trailblazers.

Is RPE Important?

Ed Kless - 07/03/2008

Under the heading of Ask VeraSage comes the following:

Over a year ago I posted on the difference profit per employee (PPE) and revenue per employee (RPE). Tonight, my wife, Christine and I had a dialogue about a case study she had written earlier in the day for a customer of hers.

The customer had stated, “RPE is my ultimate measure and all I can tell you is that since implementing the new system, it is up.” Christine then asked, “Is RPE a good measure of effectiveness or efficency?”

My gut reaction was effectiveness, but I am not so sure. Perhaps it is both, but here is where you, our loyal VeraSage readers, come in. What do you think?

Ask VeraSage:  Q&A follow-up from RainToday Value Pricing Webinar

Ron Baker - 03/30/2008

I presented a Value Pricing Webinar for RainToday on February 28, 2008.  Although I answered a lot of questions during the program, there were still many left over.

I responded to each one in writing, which RainToday posted on their Web site here.

There are many frequently asked questions here, along with some that have a new twist. 

I’d be interested in how others would have answered some of these.

RFPs and the Dreaded Winner’s Curse

Ron Baker - 03/14/2008

A couple of weeks ago I received another email from Chris Forsman, who had alerted me to an article about movie theater popcorn, which I blogged about here.

In this new email, he related this fascinating story.

Good Afternoon Ron:

I have been fascinated by pricing models for as long as I can remember and as a salesperson, it is my job to “extract” as much money as humanly possible.  I remember being in an opportunity once in which we were competing against several firms in which all of our pricing came in at roughly $750,000 for an end-to-end solution.  This number was given to us by the prospect as their desired budget and we all had to “massage” our numbers to fall into this price range.  How do you pick the winner when everyone has the same price?

One competitor, who had several recent wins in this industry priced their solution at $1,200,000.  They understood that their references would be stronger and that would somehow show that they had deeper domain knowledge. It would also insulate the executive from making a bad decision since their peers purchased the same solution.  Naturally, they chose this higher priced solution.

Best regards,
Chris

What a great story!  The $1.2M firm separated itself from the competition based on value, not price.  We always say, high price tempts, and here’s even more empirical evidence.

This got me thinking about Requests for Proposals.  We at VeraSage recommend that you don’t do them, because they subsidize dysfunctional buying behavior, often being used as a club to beat up the current provider by customers who have no intention of changing.  Or they are used by price sensitive customers you don’t want anyway.

We also think you should charge for an RFP.  Why not?  The customers are asking you to compete, which has value in and of itself.  If you charged for an RFP, it might actually be a process that had some value, rather than merely reciting deliverables.

That said, we realize many PKFs have to do a certain amount of RFPs.  If you do, you should be well versed with what economists call the winner’s curse.

Never forget that your weapon is made by the lowest bidder.
—Law Number 20 of Murphy’s Laws of Combat

In auction markets, economists refer to the dreaded winner’s curse—whereby the winning bidder is often a loser.  In other words, the only RFPs sellers will accept are ones you should not make.  One of the ways to avoid the winner’s curse is to bid more conservatively when there are more bidders.  Thomas Nagle and Reed Holden explain why in their seminal book, The Strategy and Tactics of Pricing:

To understand the curse, imagine first that you are one of two bidders and you win a bid with the lower price.  You will probably be quite happy.  Now imagine that you are one of ten bidders and you believe that your competitors are sophisticated businesspeople who know how to bid a job.  Again you win.  Are you still happy?  What does it mean that you bid below nine other knowledgeable bidders?  Perhaps it means that you were willing to take less profit on the job.  On the other hand, it could also mean that you underestimated the cost to complete the work.

The more bidders there are, the more likely you will lose money on every job you win, even if on average you estimate costs correctly and both you and your competitors set bids that include a reasonable margin of profit.  The reason:  The bids you win are not a random sample of the bids you make.  You are much more likely to win jobs for which you have underestimated your costs and are unlikely to win those for which you have overestimated your cost.

The only solution to this is, in effect, to formalize the principle of “selective participation.” You do that by adding a “fudge factor” to each bid to reflect an estimate of how much you are likely to have underestimated your costs if you actually win a bid.  Needless to say, adding this factor will reduce the number of bids you win, but it will ensure that you won’t ultimately regret having won them (Nagle and Holden, 2002:  225).

RFPs have become more commonplace as competitive bidding has replaced negotiation for price buyers.  It is as if dysfunctional buying practices have arisen to counter dysfunctional selling practices. 

It is important to judge the seriousness of potential buyers going out to bid, as a lot of the RFPs are, in reality, nothing but hammers used against existing suppliers to obtain price concessions.  Your company should not waste its resources drafting RFPs to anonymous buyers whose criteria for judging your company’s offering are not known to you.  It is important to have some contact with the economic buyer, that is, the person who can actually make the decision to hire you, rather than just the procurement department.  Establishing relationships and having internal advocates in the customer’s enterprise also helps to ensure your value is being considered, not just price.

In their book Co-opetition, Adam Brandenburger and Barry Nalebuff offer this sage advice with respect to RFPs:

There seems to be a natural impulse to offer competition for free.  After all, that is what business people are supposed to do, is it not?  You want a bid?  I’ll give you a bid…

The right question to ask is:  How important is it to the customer that you bid?  If bidding is so important, then you should get compensated for playing the game.  If it is not so important, then you are unlikely to get the business and even less likely to make money.  You might want to reconsider bidding at all (Brandenburger and Nalebuff, 1996:  84).

Another strategy with responses to RFPs is:  No surprises.  Your potential customer should know everything in your proposal before you submit it.  Gaining an understanding of your customer’s expectations, business model—how they make money—and how your company can add value is imperative to increase your odds of a successful proposal, one that will not suffer from the winner’s curse.  Search for the differences that will ultimately be weighed in selecting a new supplier.  If customers are worth bidding on, they are worth spending some resources on in order to improve your chances. 

Brandenburg and Nalebuff also discuss the following eight hidden costs of bidding (in bold, with commentary added), which are also worth considering:

1. There are better uses of your time. Keeping current customers happy may be a better strategic advantage as opposed to chasing after other company’s customers.  Attracting a new customer can cost three to six times more than holding on to an existing one, and the existing one is most likely less price sensitive.

2. When you win the business, you lose money. A customer won on price alone is signaling they have no loyalty, and will leave you once they find a lower price.  Do not fall into the trap of thinking you can start with a low price and raise it later; the evidence is overwhelming this will not work, as once you set a low price you are rewarding the customer for beating you up in price.

3. The incumbent can retaliate. If this is a good customer, then your win is someone else’s loss.  If it is a bad customer, then you have already made a mistake.  The incumbent supplier is likely to respond, perhaps by targeting one of your good customers.  He may not be successful, but he can force a price concession on your part.  If he is successful, you both have achieved nothing but turning two high-margin customers into two low-margin customers—a real lose-lose scenario.

4. Your existing customers will want a better deal. Lowering your prices within RFPs sends a distinct message into the marketplace that will no doubt find its way to your existing customers.  Some will believe you’ve been overcharging them and may leave; others will demand price concessions.  Is winning one job worth the risk?

5. New customers will use the low price as a benchmark. Once again, sending the wrong signal to all potential future customers.

6. Competitors will also use the low price as a benchmark. Since your competitors can easily discover your RFP price, they will use this as a reference price in future RFPs, most likely resulting in lower priced RFPs in the future amongst all bidders.

7. It does not help to give your customer’s competitors a better cost position. Your future and that of your customer are naturally linked.  If your future is tied to Boeing, you do not want to help Airbus get a lower price.  Unless you have very good reason to believe that you can get Airbus’ business while keeping Boeing’s, bidding for Airbus’ business is costly.  You help your competitor’s customer and thereby hurt your own.

8. Do not destroy your competitor’s glass houses. The notion you win if your competition loses is simplistic and potentially dangerous.  If you lower your rival’s profits, he now has more reason to become aggressive by going after your accounts with abandon, potentially launching a self-destructive price war.  In contrast, the more money your competition is making, the more it has at risk from getting into a price war (Ibid:  86-88).
   

This is where the firm’s value proposition becomes a critical differentiator from its competitive bidders.  By offering an unconditional money back service guarantee and competing on total quality service, your firm can maintain a premium over the competition. 

Do not let the proposal be the first time you test your price, as this can result in a waste of resources going after price buyers who have no intention of considering value. 

Another effective strategy is to offer various value propositions, in the form of differing options, within the proposal, thereby preventing it from becoming merely a one shot, take-it-or-leave-it option.  You can even use Chris Marston’s concentric circles to help you, not only to scope a job, but to offer different options. 

Maintaining your pricing integrity on the RFPs you decide to respond to sends an important message within your firm that pricing is a strategic decision—one based on value—and not just a number to be arbitrarily derived in order to make the next sale.

Be sure to maintain a mortality log for proposals submitted but not accepted.  Perform post-mortems on lost bids and determine the reasons.  This will help you focus on value for future RFPs rather than merely cost and price.  The better you know the customer and the more thorough you are at ascertaining both their needs and wants, the higher probability you have of securing your share of profitable RFP work. 

Keep the winner’s curse in mind as you prepare to respond to RFPs and be sure the potential customer is serious about doing business with you and not just using your bid as a way to lower their existing price.  Some firms have tested this commitment by charging for a proposal and then offering a full credit if the bid is accepted.

Utilizing the above advice could help your firm secure a $1.2 million engagement when everyone else’s price was $750,000.  That’s win-win all the way around.

Ask VeraSage:  Can Law Firms Offer Service Guarantees?

Ron Baker - 02/13/2008

We get asked this all the time, especially since lawyers can’t guarantee an outcome, especially in litigation matters.

But that shouldn’t stop them from considering offering a guarantee on their service—that is, the customer experience of dealing with their firm.  Here is a partial list of the benefits of offering a 100%, unconditional, money-back guarantee:

• It forces you to learn your customer’s expectations.  It’s hard to meet expectations, let alone exceed them, if you don’t know what they are.

• It focuses your entire firm on the customer’s expectations, and allows your team to do what it takes to exceed them—think FedEx, Ritz-Carlton and Disney.

• It allows you to manage the customer’s expectations.  This is especially important if the customer has unreasonable expectations to start with.  This is your only chance to set them right.  Once you’re engaged, even if you do splendid legal work, if you don’t meet or exceed customer expectations, they won’t be happy.

• It puts your firm’s money where it’s mouth is.  Sure, we all brag about offering great service, responsiveness, quick communications, etc.  How many back it up?  Talk is cheap.  As a customer, why should I bet on you if you won’t bet on yourself?

• It allows you to charge a price premium for reducing (or removing) customer risk.  Fred Smith built his unknown overnight delivery service business on three simple words, emblazoned on the side of his planes and trucks:  “Absolutely.  Positively.  Overnight.” No excuses, no complaining about traffic or weather.  If they didn’t deliver you didn’t pay, period.  Nice.  Look at the price premium FedEx commands over UPS and DHL.

• It forces your firm to do a better job in customers selection and deselection.  You won’t work with people who you think are taking advantage of you.  If a customer unfairly pulls the service guarantee trigger, fine.  Was it justified?  If so, they did you a favor, since complaints are more valuable than compliments.  It allows you to fix the systemic problem so it doesn’t happen again, and on another customer.  If it wasn’t justified, the customer self-identified themselves as unreasonable and you can terminate the relationship.

• It incentivizes the customer to complain, which is a good thing.  Most customers don’t complain, they just defect.  And a large majority never come back.  A complaint is a second chance to repair the relationship.

• It’s an enormous marketing advantage.
  

The fact is, though, that all law firms already offer a service guarantee.  The problem is it’s covert, no one knows about it.  I’m suggesting you make it overt.  Tell the world about it, get some buzz for it.  Get a pricing advantage for it.

So, what does a legal guarantee look like.  VeraSage fellow Chris Marston at Exemplar uses one, and so does Ungaretti & Harris LLP, who claims to be the first firm in the country to do so.  There guarantee reads:

We GUARANTEE that as a client of Ungaretti & Harris you will receive COST-EFFECTIVE legal services delivered in a TIMELY manner. We promise to INVOLVE you in strategic decisions and to COMMUNICATE with you regularly. We cannot guarantee outcomes, but we do GUARANTEE YOUR SATISFACTION with our SERVICE. If at any time Ungaretti & Harris does not perform to your satisfaction, we ask that you inform us PROMPTLY. We will then resolve the issue to YOUR SATISFACTION, even if it means reducing our legal fees.

Now, if you’re a lawyer, you can write elaborate contracts that try to cover every conceivable, foreseeable contingency.  There are ways to tighten up the language, such as saying that after each scheduled payment you will assume satisfaction. This will close off prior services from being exposed.  Other firms just leave it wide open.  The risk is up to you.  One caveat:  The more you water it down, the more legalese you use, the lesser it’s value.  Think FedEx:  Absolutely.  Positively.  Overnight.  Keep it simple.

For an excellent book on using service guarantees, written for companies in the services sector, see the book, Extraordinary Guarantees by Christopher Hart.

To say a law firm can’t provide a guarantee is to deny reality.  They already do, if they are ethical and conscientious professionals.

So why not make it explicit?

Ask VeraSage:  How do you price one-off meetings?

Ron Baker - 02/08/2008

One of our Trailblazers, Chris Foster sent in the following question:

Hi Ron,

I’m interested in how we should handle those enquiries from non clients regarding matters which require say a 30-40 minute meeting and no further action is required.

How should we bill these people and when do you let them know the cost?  Ideally, it should be upfront!

Would you have a minimum fee of say $300 of which the enquirer is advised at the time of making the appointment. They can then determine whether the proposed meeting will be valuable to them before the event.

I had an unpleasant experience with such a client this week which was resolved amicably but still was unpleasant enough to endure. Fortunately, I can understand their position entirely.

I would be interested in your thoughts!

Thank you

Regards

Chris

My reply:

Hi Chris,

This is a great question, as I’ve seen it handled many different ways.

My first thought was:  do you want any more customers?  Most firms do. They are more than willing to give the “first hour” consultation free.  I’ve also thought this to be a mistake, as people don’t value that they get for free.

I’m a firm believer in a minimum price, quoted up-front.  If you get work out of it, you can always apply that price (or a percentage of it) to that project.  If they come on as a customer, you can waive it entirely.

Also, these types of consultations are great to pass to team members.  Gives them experience in rainmaking, customer contact, or just handling various concerns and thinking on their feet.

So, I guess, there’s many ways to handle this, depending on your objectives.  But ALWAYS, ALWAYS, quote a price up-front, period.  Especially on something as easy as a consultation.  We only get in trouble when we invoice in arrears!

Does that help?
Ron

Thinking about this some more, I recall a customer that called my colleague Dan Morris right before Christmas holiday and wanted to meet with him urgently.  He had an enormous tax issue and wanted to see if Dan would be able to do anything to mitigate before the end of the year.

Since Dan didn’t want to sacrifice being with his family, he quoted the guy a $5,000 price simply to meet with him, with no promises he’d be able to help (If I recall right, it was a $200,000+ tax issue, maybe more).

The guy came in and paid the $5,000.  Dan offered his guarantee, if they guy wasn’t happy he could tear the check up.  He didn’t, Dan got his price and didn’t lose his pricing integrity.

I guess the moral is:  this all requires judgment.  Quoting a minimum price is essential, BEFORE the meeting.  Offering a guarantee can raise that minimum quite a bit. 

How do others handle these types of pricing issues? 

(Dan, feel free to correct any factual errors I’ve made, my memory sucks for your ship work).

Ask VeraSage:  How does a firm implement Value Pricing?

Ron Baker - 02/01/2008

I received this email from Jeff on January 30, 2008:

Mr. Baker,

I am halfway through your Pricing on Purpose book and am thoroughly enjoying it.  However I must admit I was sold on the concept before I started reading.  It is the main reason why I left the engineering consulting industry (cost plus profit business model) in favor of the software industry (value based pricing).  After looking ahead at the remaining chapters in the table of contents and jumping ahead to the final chapter, I’m concerned the book is not going to provide the answer to the “holy grail"—how does a firm implement value based pricing?

Two questions for you:

1. Do any of your previous books focus on implementing value based pricing at professional services firms?  I was recommended to a title of yours that seemed to fit this description written in 2000, but the large internet book retailers I checked listed it as out of print.
   
2. I currently am product manager for an ERP product focused towards project based businesses.  Are you aware of any software tool that has been created to help drive firms through the change to value based pricing?  On the surface it seems there is an opportunity for this.
   

Thanks for the great book and any answers you can provide.
Jeff

I remember my first conversation with Ed Kless.  He told me he had read two books that changed his life:  Professional’s Guide to Value Pricing and The Answer to How is Yes, by Peter Block.

I immediately purchased the book to see what type of company Ed was lumping me in with.  After reading it, I was humbled to be included next to Peter Block’s book.  It has become a bible of sorts around VeraSage, precisely because we receive so many “how to” questions. 

(By the way, now you know why Ed is a Senior Fellow, though he still has the annoying habit of using HKTs).

I can’t do Block justice in a short space; suffice to say he thinks starting out with “how to” questions is the wrong the approach.  That’s why he says the answer to how is “yes.” If you’re willing to pay the price to get something done, the “how to” questions tend to answer themselves.  Block argues that people who ask “how to” questions are actually against the change.

Now, I’m not saying that’s the case with Jeff’s question here.  There is a time and place for “how to” questions, and perhaps Jeff is at that point.  But when I shared his question with Ed, here is how Ed suggested I reply to Jeff’s email:

Ron,

It is actually a very simple reply.

Jeff,

Thanks for your email. Unfortunately, you are asking the wrong question. The only answer to a “How to” question is another, deeper question, “What are you refusing to do in order to begin pricing with purpose?” Once you answer this question you can begin to implement.

Take care,
Ron Baker

Seriously, I think we have to begin to respond this way. I strongly feel that once we begin to answer the how, we are sunk. They have won the battle of words. Hope this helps.

I think Ed’s right.  My book is actually full of illustrations of how other companies price.  It even has a chapter on establishing a pricing cartel and appointing a Chief Value Officer, along with plenty of resources for further guidance.  Aren’t those answers to “how to?”

I was reminded by Jeff’s email of something I wrote in the last chapter of Measure What Matters to Customers:  Using Key Predictive Indicators.

Imagine after Thomas Jefferson wrote the Declaration of Independence.  Now he has to convince others to sign it, at great peril to their life and liberty.  Using the six questions Peter Block uses in his book, here’s the questions that would most likely be posed to Jefferson—that is, if our Founding Framers thought like today’s businesspeople:

• How do you do it? 
• How long will it take? 
• How much does it cost? 
• How do you get those [other] people to change? 
• How do we measure it? 
• How have other people done it successfully?
  

How would Thomas Jefferson have answered these six questions? 

• I don’t know.
• I don’t know.
• Possibly your life.
• I don’t know.
• I don’t think you can measure Life, Liberty and the Pursuit of Happiness.
• No country has ever done it successfully the way we are proposing.  Sign here.
  

Block suggests two better starting questions: 

1. “What [type of future] do we want to create together?”
2. “What is the price [we are] willing to pay to achieve it?”
   

It is simply impossible to know “how to” do something until you attempt it.  In a free market system, it is the leap, not the look, which generates the indispensable understanding and the necessary knowledge to generate wealth.

This is why VeraSage recoils at “how to” questions, especially when people want to dive right into them without first understanding the “why to” questions.  Tiger Woods didn’t ask “how to” become a professional golfer.  He just went out everyday and paid the price because that’s the future he wanted.  Once you decide to do that, the “how tos” are just plumbing.

I know this is a somewhat heretical view, which is why I urge you to read Block’s book.  “How to” questions are barriers that people who don’t want to change use as hurdles, since once you tell them how you do it, they can easily reject your answer as not relevant to their situation, company, customers, etc.

We at VeraSage hear and see this behavior all the time.  It’s why we find Block’s argument so compelling and his book so profound.

So, Jeff, the answer to “how to” implement Value Pricing is, truly, Yes.  Just like Ed asks, “What are you willing to do to make it happen in your company?”

It’s a not a software tool, it’s a mindset change.  And it’s not a just a pricing strategy, it’s a business model change—from selling time to selling intellectual capital.

You will also find many resources right here on this Web site, especially in the Trailblazers section, from firms that have made the transition.  No two firms followed the same path to the “holy grail.” They blazed their own trail.

As will you, if, that is, you’re willing to pay the price.

Is Cost-led pricing a Root Cause or a Symptom?

Ed Kless - 01/21/2008

Eric Fetterolf asks:

I wonder if the root of the problem (cost-led pricing and keeping timesheets) is not lack of vision or education. I wonder if the problem actually exists at a deeper level — the law.

Employers are required to pay employees the hours they work. That is why firms that make time cards, physical and software based, are successful. Employees are not paid by the result, but by the punch time clock. Since the law is rooted deeply in the fundamental Marx theory of labor, (isn’t that a shock that the American labor laws are guided by Marx), is it really a mental stretch to see why many firms are struggling with the transition? They are being held to a flawed standard by our government.

The question for the court of public debate: Are we simply attacking a virulent symptom and not the true underlying root cause?

Eric, you are correct in your assessment that most labor laws are derived from Marx and that this is certainly a problem. However, from my (amateur) understanding of the law, this does not force companies to keep timesheets. I know that most companies are required to keep attendance records for exempt employees, but this does not mean that they have to pay by the hour. It certainly does not mean that they have to price and then bill by the hour.

Any other thoughts from the community?