Yesterday, I was forwarded a post from Dwayne Wright who could not be more wrong about project management and value pricing. Please read his post before continuing.
I posted wrote a comment, he rejected it saying, “Well, just rejected the first comment for a blog that wasn’t clearly SPAM. It came from a value billing advocate and was equally harsh, combative and lacking of substance.”
“Harsh, combative," HELL yes. “Lacking in substance,” I’ll let you be the judge.
My comment:
I am probably the original source of the comment about billing by the hour as being unethical. (It is clearly suboptimal and I believe immoral as well, but that is a whole other story.)
First, let me be clear, I do not accuse anyone personally of being unethical; it is the practice that is unethical because it promotes some very bad habits.
It puts the consultant and the customer is an adversarial role. It is in the consultant’s financial interest to maximize hours; in the customer’ interest to minimize hours.
You state, "It also says this (hourly billing) is often used when a precise statement of work cannot be quickly prescribed. Does that sound familiar to you and your consulting business?" Yes, it sure does and that is just plain wrong. Prescription before diagnosis is malpractice in any profession.
While the PMBOK (and PMI, in general) have some good things to say about project management, they are overly obsessed with costs. After all most of this stuff comes from government (think defense contractors and NASA). In business, customers do not care about your costs, nor should they. They care about the results. They pay for results not efforts. This again is a misalignment.
You are arguing that the risks should be borne by both the customer and the consultant. That is just wrong. You are the one with the knowledge not the customer. It is your job to spread diversify your risks across all your customers not put it back on each of them. Your customers hire you because of risk. If what you did was easy, you would not be hired in the first place. To put it back on them is ludicrous.
Lastly, it is not "vale billing" is it "value pricing" or better yet "pricing on purpose." A price is set ahead of time a bill comes after the fact. You bill now, we at the VeraSage Institute, encourage you to set a price beforehand.
By the way, Dwayne Wright, you are free to post any comments here they will not be rejected. You can thank me later for giving you are larger audience then you ever thought possible.
This is the second in a series of postings about my thoughts from sessions that I attended at the Information Technology Alliance’s Fall Collaborative (<-I love that word) held in Palm Springs. Since they are all not appropriate for this site, those of you who are interested can see the others as they appear at www.edkless.com.
Presented by Jeanne Urich of SPI Research. The highlight of my ITA experience occurred during this session when Jeanne acknowledged that a conversation that the two of us had at the spring ITA meeting has influenced her thinking and that she now believes that fixed price agreements are better for customers and consultants. Now to convince her to give up on these dozens of benchmarks! I think this will be a much harder task.
The study consists of 175 metrics, 20 of them deemed key performance indicators. The problem in my mind is that all, save one of the 20 are inwardly focused on the firm, even those in the “Service execution” and “Client relationship” areas are firm-based.
The problem as I see it with most benchmarking is that it focuses us on all the wrong things: the past rather than the future; internal rather than the customer; efficiency rather than effectiveness.
For example, one “customer” metric was about project completion success. The question was asked of the providers, “What percentage of your projects are completed on time and on budget?” The average answer was 74 percent. This more than doubles the number (35 percent) according to a study done by The Standish Group who asked the same question of customers. Needless to say, I side with customers on this one. Again, to her credit Jeanne acknowledged this flaw.
Many of the other metrics are based on the false premise that value delivered is equal to rate times hours, aka, the labor theory of value. This theory is demonstrably false and belief in it has been proven to cause harm.
I have sat in on countless benchmarking session and the reactions of the attendees is always the same: a) if they are doing better than the benchmark, they think they are OK and do nothing, and b) if they are worse than the benchmark, they dispute the data and still do nothing. Path (b) actually happened twice during the session!
My beef with all benchmarking in business is that while it attempts to appear scientific, it is not even close. To her great credit Jeanne is very careful about saying that these metrics are correlative not causal. Unfortunately, most people do not understand this distinction and are lulled into the illusion of control via data.
The findings are always similar and in many cases are nothing more than a bunch of truisms:
Firms who market well have higher revenue. (Yet, marketing spend, even among top firms, is less than average across all industries.)
Firms who close more business (win to bid ratio) are more successful. (The question is, what do they do differently that allows them to have a higher win to bid ratio? Win more or bid less?)
Few firms grew revenue in 2009.
Clear vision and strategy and taking care of your people are important in professional firms. Firms that focus on culture are rated as better places to work. (What kind of culture?)
Conclusions are almost always the same - “Increase revenue, lower discretionary spending.” Always a good idea.
I was honored to speak at the ITA Fall 2009 Collaborative in Rancho Mirage on the topic of monitoring an controlling project in software implementation engagements.
During the presentation I did a brief workshop on dealing with resistance. The video clip is part of the introduction to that topic. My thanks to Wendy Gorrie of Plus Computer Solutions for agreeing to serve as my videographer for the session, she captured way more that I had hoped. (I hope the blood returned to your arm, Wendy.)
I am deeply indebted to Peter Block who developed this idea extensively in his book Flawless Consulting.
If you are interested to view the entire segment, please send me an email at ed.kless *at* choosegreat.com.
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.
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?
A little over three years ago, a dialogue began in one of my consulting classes that I teach for Sage. The conversation focused around the levels (I am not convinced levels is the right word) of consulting. In the end, the group proposed the following four levels: Findings, Options, Recommendations, and Decision. Serendipitously, this yielded the acronym FORD. (I personally own a Honda Pilot.)
This model has served me quite well over the last few years, so I thought it worthy of a post wherein I will briefly define each level and provide some overall thoughts about the model.
Findings - these are the issues (problems, opportunities, and desired results) that the consultant uncovers through a question and answer process, referred to by most as discovery.
Options - these are the different possibilities that the consultant proposes for solving the uncovered problems, seeking the opportunities, or achieving the desired results. A great consultant always includes, “Do nothing,” as an option.
Recommendations - this is the option (or options) that the consultant believes would be the best course of action for the customer. Making recommendations would usually include a list of advantages and disadvantages (pros/cons, positives/negatives, strengths/weaknesses, whatever you want to call them) of each options and a rationale for why the option(s) was(were) selected.
Decision - one of the various options or a variation of the options is selected for implementation.
A few observations about the model:
Each incremental level increases the level of risk on the consultant and requires an higher degree of knowledge. Since risk and knowledge required are factors in setting price, an engagement to just collect findings will be less expensive than an engagement to present options and an engagement to present options will be less expensive than an engagement to provide recommendation.
If you are making the decisions you are not a consultant, but what Peter Block would call a surrogate manager. He defines this as “a person who acts on behalf of or in place of a manager.” Surrogate manager-hood is not bad in and of itself, but it is way more risky and deserving of a premium price.
Being a consultant or a surrogate manager is a strategic decision. Some people may choose to never enter the fray as a surrogate manager and only remain in the role of consultant. This leads to what could be another blog post - the paradox of consulting - which is that consultants are paid to not make decisions.
It is critical to have a conversation early on with every customer or prospective customer as to the level of consulting in which they would like to engage you. Failure to do so causes not only pricing problems, but myriad of other problems that are out the scope of this post.
I believe that all professionals are consultants of some kind. Doctors are consultants on the anatomy and physiology of the human body; lawyers, on the law and legal system; accountants, on accounting practices, etc.
I welcome any comments and any suggestions on a better term than my proposed levels.
On my recent trip to Australia, I met Colin Jasper, Director of Jasper Consulting.
An actuary by education, Colin was an incredibly interesting person with whom to discuss the merits of Value Pricing versus hourly rates.
We agree, as Colin suggests, on 95% of the issues. We have an enormous disagreement over whether there are instances where hourly rates still make economic sense.
This debate was launched again when Colin sent me an article he had written, with Libby Maynard, for the September, 2009 Asia-Pacific Professional Services Marketing Association’s Journal.
Colin and Libby have kindly granted me permission to post the article, and our subsequent debate surrounding its contents.
It may seem odd that I am engaging in a debate with someone who agrees with 95% of what we stand for, but I do so because economics is concerned with marginal activity—that is, the next unit of production, spending, etc.
Thought experiment: you have an incredibly large bag of straws and a camel. You begin placing individual straws on the camel’s back, one after the other. At some point, the proverbial camel’s back will break.
If straws could think and talk, they would shout: “Hey, everything was fine until that last straw got here—he broke the camel’s back.”
The arenas where Colin is arguing that hourly rates are still appropriate is when firms are at the top of the Value Curve—at the margin, where using hourly rates is obviously the most sub-optimal.
I find his reasoning unconvincing, but I thought you might like to read the debate, draw your own conclusions, and hopefully, join in.
Here was my initial response to Colin’s article:
Hi Colin,
It was great to meet you as well and have a robust discussion on pricing.
I read your article with great interest. As you can imagine, I have many disagreements with its premise.
Here are just some:
Page 9, you say “few practitioners have sought to truly master the concept of alternative pricing structures...” This may be true as a percentage of firms overall (we estimate somewhere between 5-7% are doing real Value Pricing), but that overlooks that there are thousands of firms across all professional sectors—advertising, accounting, IT, consulting, and law—around the world that have adopted Value Pricing. Some advertising agencies are doing 100% Value Pricing and no timesheets, such as Crispin Porter and Anomaly, and Coca-Coca and P&G have their own Value Pricing compensation models with their thousands of agencies. Neither look at timesheets. These are significant numbers that are hard to dismiss, and they have proven that alternatives to the billable hour exist for all sorts of complex engagements.
On page 10, you say both client and firm should be involved in exploring and choosing the pricing approach. Yet this is not the way most industries have changed pricing strategies. Did the airlines or hotels consult their customers and ask if they could adopt Yield Management? Sellers change pricing strategies, and competition insures that customers get value. I have no problem with firms discussing alternatives with clients, but the onus is on firms to bring innovative ideas to the table, not their clients. General counsel have their own businesses to run, and don’t sit around and think about the economics of their law firms. Nor should they, anymore than you and I should be innovating the next Apple iPod or its replacement. Firms have used this very logic as an excuse to do nothing, since clients have not driven this change to date (though there are exceptions like Cisco, Pfizer, etc.).
You also state that using the wrong pricing structure can destroy value and damage relationships, and that is certainly what hourly billing has done, with its misalignment of interests, and considering it’s the wrong theory of value. The alternatives you list on page 10 are simply the billable hour in drag, and in no way are they alternative pricing structures. A price is given up-front, hourly billing is done in arrears. I assure you customers want a price, not a bill after the fact—this is basic economics. And these alternatives are still measuring value in terms of time, which is the wrong economic theory of value—and that is irrefutable, as my books and many others make clear.
On page 12 you say hourly rates are criticized because they encourage and reward inefficiencies. But that’s certainly not my major argument against them. My argument is the whole idea is based on the discredited and falsified Marxist Labor Theory of Value. Eradicating the “we sell time” mentality does lead to greater value creation, because it’s a different theory. This has been proven again and again, as all of our Trailblazer Case Studies prove. You can just read a few and see how the entire mentality of a firm is transformed to an obsession with value and results, rather than hours, inputs and costs.
You say that a tradesman complaining that his saw won’t drill a hole in the wall, etc. But hourly billing the wrong tool. It’s plunging a ruler in the oven to determine its temperature, and you’ll never get the right answer with it, period. This is why it’s universally hated in the professions, and it’s also why NO OTHER BUSINESS ON THE PLANET PRICES THIS WAY. There’s a reason for this. It simply is not a measure of value. You are arguing that Jonas Salk’s polio vaccine is valuable to the extent of the time it took him to develop, and that is economically illiterate. Period. This was settled by the Marginalist Revolution of 1871, and is well understood by economists.
You then argue that since a firm can’t define a scope, hourly rates are appropriate. This is nonsense on stilts. A scope of what the firm does know can always be done, as Chris Marston of Exemplar, Mark Chinn, Fred Bartlit (Bartlit Beck, which has never billed an hour for large clients) and Jay Shepherd, have proved in complex litigation cases. Marston’s concentric circles are the answer, as is phasing. To say that every job is a complete black hole with no “known knowns” defies reality. It also makes me, as a customer, question the expertise of my firm. As Jay Shepherd has written on his blog (The Client Revolution), there’s only one question you need to ask your law firm to determine if they are experts: “What is the price?” If they can’t answer that, they are not experts. He’s right.
You cite the Johnson and Kaplan book, which was the launch of Activity Based Costing. Have you read the book that Johnson wrote after that one? Profit Beyond Measure. It shows how Toyota doesn’t use a standard cost accounting system, and how firms should not let cost accountants drive strategic decision making. It’s a seminal book, and I have discussed it in great detail in my Firm of the Future, Pricing on Purpose and Measure What Matter to Customers books.
Hourly billing rests on the wrong theory of value, that’s our major case against it. If you begin with the wrong theory, I don’t care how efficient a firm is in implementation, it will be suboptimal. There is no right way to implement a wrong idea. Cost-plus pricing—of which hourly billing is a cousin—is dying in industries around the world, as part of the pricing revolution.
VeraSage has destroyed every single argument for hourly billing. We haven’t heard a new argument in over a decade, and your article is no exception. There are answers to every one of your defenses, and they are being done in firms around the world. You can find many examples all over our web site.
All that said, I still enjoy our dialogues and hope we will keep in touch.
Thanks Colin, enjoying the debate!
Sincerely,
Ron
Here’s Colin’s reply to mine:
Hi Ron,
I appreciate your thoughtful response and I too enjoy the dialogue. I have spoken to the article’s coauthor and we are both happy for you to publish it on your website.
With regards your specific comments:
I think we both agree that all professionals and their firms can benefit from building their value-pricing capabilities. Jasper Consulting was established with the purpose of helping professional service firms create value for their clients and capture a fair share of the value for themselves.
I take your point that firms should the lead the change. I do see differences however in consumer pricing (e.g. Apple iPod) and B2B pricing (e.g. Legal services to corporates and governments). If a consumer does not like a price their only option is to vote with their feet—or wallet. In a B2B environment, particularly at the big end of town, clients negotiate. They do not simply negotiate the price level but also the price structure. The challenge is how to overcome client buying behaviour. Most large organisations have legal panels with multiple firms on these panels. To get on a panel they put out tenders, largely based on hourly rates. If a firm says they do not provide hourly rates, in all likelihood they will not win a spot on the panel. No large firm can afford to be excluded from all of these large panels. Hence I see a role in educating clients as well as firms.
Firstly I don’t understand why you think the pricing structures listed are ‘simply the billable hours in drag.’ Do you not advocate that a value-based price be a fixed fee?
Secondly, with regards to providing a price up-front, I believe this is exactly why some clients seek hourly rates. In the panel example, they don’t know what the work will be in 2-3 years but they want embedded relationships rather than a range of quotes for each individual transaction. The only way they can be sure that the relationship price is fair is to agree a mechanism for charging up front. On a separate example, a law firm has just been awarded the first stage of an extremely large, one-off major infrastructure project in Australia. This first stage might be between 2-5% of the entire project. The client’s preference is for a single firm to serve them throughout the project but as the full requirements of the project can’t yet be scoped (i.e. the project could take an almost infinite number of directions) how other than hourly rates can the client agree a price that is fair up front?
You misrepresent me when you say that I’m arguing the polio vaccine is valuable to the extent of the time it took to develop it. I agree that in most circumstances hourly rates should be avoided. The only point we disagree on is that you believe their is no role for hourly rates and I believe there are some occasions when it is the most appropriate pricing structure (as indicated above).
I agree with you that the mindset must be first and foremost on creating value. Where firms do this really, really well—they can justify charging a higher rate (Ron—I can sense your response to this statement from 8,000 miles away).
It’s not about the firm not defining the scope, it’s about the client not being able to define the scope of their requirements. Back to the panel example. If the client wants you to work with them for the next 4 years they are not going to know what their legal needs will be, nor which of this work they will want your firm to do. They don’t want to enter a relationship where for each individual matter that seek competitive bids to ensure your price is fair. From an economics perspective perhaps hourly rates are appropriate where a) the cost of scoping is enormous relative to the amount of work to be done and b) switching costs are high.
I think we both agree firms must focus first and foremost on value (creating value).
I think we both agree that firms should develop their value-based pricing capabilities (capturing value).
I think we both agree hourly rates are over-used in the profession.
The only area I think we disagree on is that I believe there are occasions where time-based billing is the fairest structure for both clients and firms.
Kind regards
Colin
Finally, a short reply to Colin, as this post is already too long:
Thanks for letting us publish this on our Website.
I still find your arguments unconvincing.
I don’t think there’s much of a difference between B2C and B2B. Economics is economics, and only humans buy things—there’s nobody here but us people as economist Herbert Stein used to say. This is why IBM’s slogan of “No one ever got fired for buying IBM” was so effective.
I heard stories while in Australia from both firms and general counsel that firms that only offer fixed prices, and no hourly rates, were put on the panels of some very large companies. It seems to me that if a firm is able to differentiate itself effectively, then clients will work with them no matter how they price. Firms such as Advent, Optim, Marque in Australia, and Bartlit Beck, Wachtel Lipton among others in the USA prove this point.
If the only way a firm can get on a panel is to have hourly rates, that’s a very uninspiring reason to hire a law firm. This is a purpose, strategy and positioning issue, not a pricing issue.
The alternatives you suggest are the billable hour in drag because firms are still comparing the rates to an hourly rate. Even though a fixed price is quoted, the firm is measuring value by time. If Jasper Consulting wants to help law firms create and capture more value, why are you still letting Marx’s labor theory of value drive your thinking?
I don’t buy your argument that clients will only put firms on panels if they commit to an hourly rate. A fixed price is a mechanism for agreeing to price up-front. This actually is far more transparent than hourly rates, and can easily be shopped.
And an hourly rate is not a price. How can a client know what a price is by getting an hourly rate? This reminds me of the communist obsession with inputs over outputs.
Why would you want to use the hourly rate in complex jobs. It is precisely these jobs where firms are adding the most value and need to move away from hourly rates. For the life of me, this makes no sense. You’re telling firms such as those that defended Bill Gate’s Microsoft against anti-trust violations to use the hourly rate because the job cannot be scoped? Any firm that did this would find its pricing to be incredibly sub-optimal.
Alright, enough from me, let our readers join the debate.
I often state a truism that I stole from someone I can’t remember - In consulting, as in medicine, prescription before diagnosis is malpractice. (If you are this person, I apologize, I owe you a beer.)
In a recent conversation while on a walk with my wife, Christine, we concluded that there is a corollary to this rule - You can’t prescribe if the patient/customer will not let you diagnose.
I hear about this problem more than a couple of times a week from Sage partners with whom I am speaking. It usually manifests itself like this, “Ed, I was trying to get an understanding of why the customer thought a request they had made was important, and they told me that they don’t reveal that information to outsider consultants. What can I do?”
My initial response is a half-kidding, “Run away!”
After explaining that I am kidding, sort of, I state, “Perhaps you should suggest to them that they reconsider and explain that while you understand their concern, it is not in their best interest to withhold this information. Consider this - if you go to a cardiac surgeon and just ask for a triple bypass operation, any ethical doctor will first insist on a few tests before performing the surgery. Certainly, they would want to take your blood pressure and heart rate. Would it make any sense to say, ‘Hmm, I don’t know, I don’t think I want to reveal that information to you.’? Clearly, it would not. I am in the same situation as the doctor, without a full understanding of the problem, it would be unethical for me to proceed. So, I ask you to reconsider and answer my questions. If not, I really don’t think I can help you.”
Is this hardball? Maybe, but your only alternative is to violate your ethics and prescribe before diagnosing.
On May 12, 2009, I presented a session at Sage’s annual partner conference, Insights. The session was entitled Issue List Management (or how to replace your time sheets with something that actually matters to your customers).
And finally, the big finale! This is only for those of you who are radicals (like me) - a song which I believe demonstrates the immorality of tracking your time.
One of the problems with the Almighty Billable Hour is it provides zero knowledge in terms of how to improve pricing.
How do we know? Because we hear stories like the following I received earlier this week from a CPA colleague. I’ve sanitized the names to protect the guilty.
Here’s why there’s no education in the second kick of the mule:
Hello Ron:
Been meaning to write to tell you a story.
I recently got a new SEC audit client. The predecessor auditors were a large regional CPA Firm.
The engagement letter for the 2008 year end wasn’t signed until about March 10. The client and auditors met in mid February to iron out the fee. By the time the letter was signed, at least 90% of the audit was done. The client fired them for various reasons, and hired us about a month after the 2008 audit was completed.
Client receives a letter and an invoice about a month later from the predecessor CPA Firm for overages on the audit—67% higher than the so called fixed fee in the engagement letter. The explanation is they had all of this excess time and so on and so forth. CPA Firm provides hour and rate detail and reduces their standard rates by 20%.
Needless to say my new client is rather upset. Me being your disciple says to the CEO “It isn’t your responsibility that they can’t manage things on their end” and “You sell your product for a set price and it is up to you to make money at it. They have to make money at what price they sell you the audit.”
I point out how the engagement letter says that if they get into trouble on hours that they will contact client and discuss and agree on a resolution before they go further. Too bad for the CPA Firm that they didn’t do that.
Audit Committee Chair sends a polite letter saying we don’t accept invoice and gives a couple of reasons, including what the engagement letter says. CPA Partner writes an email back asking for a telephone conference to resolve. My client was already steamed, but that was the straw that broke the camel’s back. Long email back that discussed a bunch of things, and questions how could things have gotten so bad hours wise when they were almost done when they set the fee.
Of course, I’m thinking of your writings as all of this is going on.
There were several reasons I got this job. For one, I have a different professional approach (predecessor was very adversarial). They like me. But most importantly, I gave them a firm fixed price—lower than the new quote from the old CPA Firm but one I can be very profitable at.
Amazes me how a large firm like that one could get that big with this kind of behavior.
Firms make this mistake all the time, never learning a single thing from losing the customer.
The billable hour and timesheets lets the firm off from doing the following: proper project management; communicating with the customer scope creep changes; pricing up-front, which all customers expect for everything they buy; the opportunity to win back an unhappy customer.
It’s one thing to lose a customer over bad service, or a mistake. It’s quite another to lose them over something like this. There’s little chance of regaining the trust lost due to this type of stupid pricing.
And here’s the sad thing: The larger firm will blame losing the customer because of a lower price competitor. This is the ultimate excuse, enabling the firm to never have to look in the mirror to see what they did wrong.
Long before there is a problem with price, there’s a problem with service and value, as this story illustrates.
When will firms learn it’s the billable hour that is killing their value proposition?
In our experience, there are two reasons why Value Pricing fails in firms. First, the price quoted was simply too low because the value created was misunderstood, or—and this is more common—the firm just wimped out on the price.
The reasons why this happen are many—no Chief Value Officer, no pricing cartel formed, no responsibility or expertise in pricing, not willing to take risks, not learning from successes and failures, no intellectual curiosity, among others too exhaustive to list.
Second, firms are horrific at scoping projects, project management, and communicating with customers up-front about what is covered in the price and what is not. This leads to the insidious scope creep, the largest killer of Value Pricing initiatives across all firms.
There’s a saying that if you do something stupid once, it’s a mistake. Do it twice, it’s an ideology. Why professionals can’t learn to back off from work that isn’t pre-authorized by the customer has always amazed me. I couldn’t do when I practiced because of what I was taught by my leaders. It wasn’t until I became convinced it was the right thing to do for the customer that I began to change my behavior.
None of us would give our auto mechanics a blank check for repairs just because they found another problem. If auto mechanics and contractors can adequately define scope and issue change orders, why can’t we?
Ed Kless and Chris Marston have both written wonderful posts on scoping projects, another of which is on Chris’ blog. There is a framework to follow, but as with the rest of Value Pricing, you have to find your own way.
In that spirit, Trailblazer Matthew Tol sent me this thought-provoking email on his firm’s approach to scoping projects as well as managing the customer’s expectations.
Ron,
I have just come from a meeting with a business which was looking at us to do some work for them. From that meeting, I learned an interesting new concept with regard to scoping and explaining it fully to the potential client.
The business they are in is an absolute mess—they have no idea of where they are financially and have spent the last eight years building an operation which has grown at in excess of 65% (compound) annually. In short, they have done a spectacular job of getting to where they are now but they’re not sure where that is!
The first problem is that their systems are way way way below the level they need to be. They want help in getting their information up to date and then assisting them with developing new systems to cope with their planned growth from here on in.
The second problem they have is they have an ex Consultant (ex Big 4 Accounting Firm) who was wanting a fixed price (which is a good start) for the agreed scope. In our discussions however, it unfolded that many of the issues they had assumed were within their scope were in fact potentially outside of it.
Issues such as incomplete records, erroneous assumptions on the part of prior staff and God knows whatever else. We proceeded to have a rather detailed discussion on the scope whereby we likened the issue to peeling back the layers of an onion—the initial scope was to peel back one or two layers. If we then found that we needed to keep peeling back layers due to what we’d found, then we would be downing tools and seeking a discussion with them as to their preferred method of progress from there on—they fix it or we have a Change Order and we’d attend to it.
It is the assumption gap that creates the issue here—unless the scope is very precise and detailed, you’re bound to have problems. To ensure your scope is correct and valuable to the client, you need to spend a fair bit of time questioning not only what they want but why they want it and what they will do with the outcomes from the engagement. The understanding leads to precision.
The base learning in scoping discussions is that initially we assume that everything is OK (natural when you’re speaking with a potential new client). Once you’ve done it a few times, you find the scope is a bit like an onion—we need to understand that the scope may expand down through a number of different layers.
Having your initial scoping deal with the known and unknown layers ab initio can save a pile of time (and pain, angst, badwill and fees) down the track. It will ensure the relationship gets off to the best start and gives it a great chance of developing and growing over the duration of the engagement.
Maybe our lawyer friends could take something from the above that will help them get on the bus (ref ”Talkers are no good doers” post).
Kind regards,
M
Thanks for sharing your intellectual capital Matthew, your progress continues to inspire all of us here.
Some of our fellows believe one way to incrementally implement Value Pricing is to begin with a clear scope document in the Fixed Price Agreement and start issuing change orders.
You don’t have to be very skilled at pricing to achieve this. And since it’s the hardest part of Value Pricing, as well as the largest reason for failure, it’s probably a good place to start.
Perhaps another Key Predictive Indicator for the pricing cartel could be how many times someone identified scope creep, and what percentage of the time does that lead to change orders.
We’d love to hear from other firms on how they approach scope creep.
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.
Ron Baker sure knows how to get my Irish up. (Save your political corrections, I am Irish, I get to say that.) Last week he sent me a link to the WebCPA article by Jeff Stimpson, Project Management: A Means to Efficiency.
Ah, where to start, oh, I know the title! It is inane. Real project management is concerned primarily with effectiveness not efficiency. It is customer and result focused. Its purpose is to insure that the objectives are met according to the customer’s expectations, not to make the firm more efficient and certainly not to protect the firm in the case of a lawsuit. I have battled about the latter belief at just about every project management course I have attended or facilitated.
The teaser sentence is no better - “Staffing issues, varying types of engagements, and a need for greater profitability are causing firms to sharpen project-management skills.” Really! How about wanting to provide better information, not to mention insightful knowledge to their customers? Once again, the focus is wrong, inward, rather than outward.
Perhaps Jeff Stimpson is not to blame since these occur before his by line. In fact, the first quote of the article from Kenneth Jones at least speaks of providing better customer service although it seems to be speaking of it as an afterthought.
The article often references “professional standards” and “quality processes” such as Six Sigma as being necessary to insure that a firms project management is efficient. This is rubbish - knowledge workers are not factory workers. Knowledge transfer cannot be streamlined, nor would you want it to be. The article quotes several “quality experts” who, in my reading of the article, fail to understand the primary absolute of quality - quality is conformance to a requirement rather than goodness. The original guru of quality Philip Crosby in his masterwork, Quality Is Free, first posited this idea.
This idea is critical to understanding quality, yet so few people (yes, even the quality experts) fail to grasp it. A firm cannot say that it does quality work, only a customer can say that about the firm. As Miliken & Company, an international textile and chemical firm and a Malcolm Baldrige National Quality Award winner, state, “Quality is not the absence of defects as defined by management, but the presence of value as defined by customers.”
The article then goes on to quote (or perhaps misquote) expert after expert waxing on the wonders quality and how it improves a firm internally. One of the most egregious occurs in the section entitled The Form. In it, knowledge workers are reduced to being “budget models” and “supply-versus-demand in total.” Then comes the coup de grace, “firms can look at clients’ data as the ‘raw material.’” Boys and girls, please keep your knowledge workers away from anyone who in any way equates your customers to raw materials.
The process then described is downright foolish:
“If we think of a business tax return as a project, then when we got a thousand of them at once, we said, ‘Okay, let’s take a look at the processes to make sure each return goes through the process efficiently,” says David McCarthy, shareholder and director of profit enhancement services at Rea. “We document out each process step and ask, ‘Is this value-added process step, or a business non-value added, or a non-value-added step?’” Hostetler also says, adding that the goal is to shrink, if not eliminate, the last. Rea’s process also especially goes after bottlenecks and other obstacles in the workflow.
“Let’s say we’ve got five people, and when they’re done with their process step, they’re dumping it on one person. That person becomes the bottleneck,” Hostetler points out. “We try to find ways to sort resources to have another person at that ‘bottleneck’ person’s level.” He adds that typically such an overloaded staffer would be a tax manager or shareholder, or, towards the end of the process, even a staffer in an administrative role.
“Can you see how that’s so similar to a manufacturing process?” McCarthy says. “Last tax season, we got more returns out the door with fewer people and less stress.”
Yes, but did you provide high quality returns from the perspective of the customer? Did you provide any insight or value to those customers or did you eliminate the knowledge worker who could have provided that insight as a “bottleneck?” How does one decide what is a “non-value-added step” for a knowledge worker?
The Reasons Used section of the article is no less absurd although it is less offensive. “What if every time you went into Starbucks, your cup of coffee was different? They use standard cups and temperature, standard pricing and delivery time. Product management is about standardization.” Bullshit! First, the analogy is as bad as week-old cup of coffee. Every cup of coffee at Starbucks is different! Let us do some quick math. Three sizes of drinks times five different milk choices times four coffee choices times seven syrup flavors times three foam levels is 1,260 and I am leaving stuff out! Second, project management is not about standardization. It is about providing a framework to insure the provision of value to a customer.
In the Infrastructure Needed and Software sections the author trots out the standard second defense (cost accounting) of timesheets. When will these folks learn that once you refute a theory you cannot continue to use it in defense of your argument? If labor does not equal value for pricing, then labor does not equal value for cost accounting. You cannot refute my argument that the world is round by saying, “Yeah, but what if you fall off the edge.”
A quick side note - Microsoft Project is a piece of crap! The most harm Microsoft has done to the world was naming the product Project. The real project managers of the world now have to spend needless time on explaining that the mpp file created by that software is not a project plan. It is a pretty and mostly useless Gantt chart. Where is the concept of scope in Microsoft Project? Hint, it ain’t there.
In the section Pros and Cons, we have this gem. “The toughest aspect of project management was the initial load of client budget information, according to Gaino and Archer, who add that their firm, much smaller then, had to ‘literally’ lock 25 staff and partners in a room and not allow anyone to leave until their client budgets were entered into our system, and reviewed and approved by the partner.” Ok, that is downright funny! I love when inappropriate quotation mark usage meets oxymoronic language. They literally put literally in quotes!
While funny, the reality saddens me. The wasted intellectual capital spent inputting a lagging, non-customer centric budget number astounds me. How does that help them in the future? Yippy, Skippy, we met last year’s budget! So what and who cares? Certainly not the customer!
My best advice about the Best Advice section is never to get to it.
A side note about the side bar on sample metrics - there is not one that is customer centric. At least one, however, is predictive - cycle time. The most important, on-time performance, eludes them.
Oh, by the way, the article needed a better editor; I counted at least three times where project management was referred to as product management. I guess quality control does not apply to journalism for accountants.
In the Spirit of the Fourth of July when we celebrate our country’s independence as so eloquently written in our Declaration of Independence, I feel the need to add another self-evident truth to the VeraSage Declaration of Independence.
In the past week, we’ve been answering critics of eliminating timesheets (unfortunately I can’t tell you why yet, but we’ll be able to in October). Every critic invokes the metaphor of a manufacturer to defend timesheets for cost accounting purposes.
Not only does this metaphor ignore the fact that Toyota has never used a standard cost accounting system—which doesn’t seem to have imperiled it in terms of innovation, growth, and profitability—it’s offensive on a completely different level.
PROFESSIONAL KNOWLEDGE FIRMS ARE NOT MANUFACTURING PLANTS!
Sorry, I don’t mean to scream, but this is getting very annoying. Why in the world do people equate an accounting, law, advertising, or IT firm with a factory? Do they really think knowledge workers work to the rhythms and cadences of an assembly line? Do they really think that efficiency in knowledge work is as easily measured as observing someone doing a repetitive job on an assembly line? Knowledge work is iterative, not repetitive.
Just this past month in the Practical Accountant there is a cover story entitled “Project Management: A Means to Efficiency.” The entire tone is to apply Six-Sigma and other manufacturing concepts to an accounting firm. (Ed is going to have more to say about this ridiculous article, so I’ll restrain myself from commenting further).
Would we want to do this with surgeons? Would you rather have an efficient heart surgeon, or an effective one?
In a factory, the worker serves the system, but in a knowledge office, the system serves the worker. In fact, the knowledge worker doesn’t even need to be in a fixed location, since they are able to do their work sitting at home, in a Starbucks, on a boat, or on the top of a mountain. So why the hell does everyone keep invoking the manufacturing metaphor?
This Gospel of efficiency can be traced back to Frederick Winslow Taylor in the late 1880s, who was famous for conducting time-and-motion studies and increasing the productivity of factories throughout the country. It was Taylor’s Scientific Management Revolution that we owe an enormous debt to for creating a large part of our standard of living.
But his principles are obsolete in a knowledge environment, yet they refuse to die in the minds of many leaders of—and consultants to—professional knowledge firms.
Not only must we rid ourselves from the billable hour, we also have to excavate ourselves from the manufacturing metaphor. It simply does not apply to knowledge workers. This doesn’t mean that certain systems, processes, or procedures used in manufacturing can’t be useful—every PKF could learn an enormous amount from Toyota. But Toyota behaves more like a PKF than most PKFs!
What we can’t do is let those manufacturing principles become the talisman for running a PKF. Here’s why. Consider the father of the modern assembly line, Henry Ford. Here is what he wrote in his autobiography My Life and Work in 1922:
Factory organization is not a device to prevent the expansion of ability, but a device to reduce the waste and losses due to mediocrity. It is not a device to hinder the ambitious, clear-headed man from doing his best, but a device to prevent the don’t-care sort of individual from doing his worst.
Not exactly an enlightened view of industrial organization, let alone a PKF!
Knowledge workers are not factory workers, and PKFs are not manufacturers. This is as important to understand as Value Pricing and why timesheets must be trashed.
It’s time to declare our Independence from the Ghost of Frederick Taylor. PKFs are not manufacturing plants!
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.
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