Community Section -
Innovation
Ron Baker - 07/27/2010
Thanks to John Chisholm, some of Australia’s legal firms are taking Value Pricing seriously and establishing value councils, while a few are placing the timesheet on the dust-bin of history.
One of those firms is the Perth firm Lavan Legal, with 20 partners and 200 team members. It has appointed a 10-person pricing committee. As this recent article in The West Australian makes clear, Lavan is planning to trash its timesheets.
John and I have had the pleasure of working with Lavan, and the managing partner, Greg Gaunt, and the deputy managing partner Dean Hely, are both visionaries in the legal profession.
Lavan does major litigation, and although they are still making their way towards pricing this work based upon value, early results are encouraging.
There’s another firm in Perth going down the same road, as well as other firms throughout Australia.
Another firm with an innovative business model is Marque Lawyers, founded by Michael Bradley. I’ve had the pleasure meeting Michael and he truly has a Zen perspective on the practice of law—a refreshing and optimistic point of view about the future.
Michael was recently interviewed by Lawyers Weekly, where he linked timesheets to depression in the legal profession.
Two other articles in Lawyers Weekly discussed the VeraSage Institute’s Quest to bury the billable hour and trash timesheets: Take timesheets to the gallows and The man on a timesheet-killing mission.
Earlier this year in May, The Honorable Wayne Martin, Chief Justice of Western Australia, delivered a speech on the perils of both the billable hour and the timesheet. You can read the Judge’s speech here.
Obviously, something is going on Down Under.
It’s not enough to advocate that firms move to Value Pricing. The timesheet must be attacked as well.
After all, it is the timesheet that is the ultimate cancer, because it is the wrong measuring device for intellectual capital.
Thinking that we are measuring the efficiency, let alone the value, of knowledge workers by denominating everything into hours is simply ludicrous.
It’s the equivalent of arguing that Jonas Salk’s polio vaccine is valuable to the extent of the time it took him to develop it. Or that we could make Einstein more efficient if he had only completed a timesheet. Otherwise, how would we know he was on budget?
With firms like Lavan and others in Australia, true business model innovation is taking place.
By ridding their firms from the hegemony of timesheets, these firms are showing real change is possible, not just lip service about “alternative fee arrangements.”
If you are still are tracking time to justify your firm’s pricing, or to measure the “efficiency of your team,” you are billing by the hour and not doing anything new since timesheets were introduced in 1919 to the legal profession.
You are simply “selling time” just as much as any union employee. The world has changed since 1919.
Real innovation will only come when timesheets are trashed. And Australia may just be ahead of the United States, at least in larger firms.
Congratulations to Lavan Legal, a Trailblazer Firm in the making.
Ed Kless - 07/23/2010
John Shaver of Aries Technology in Knoxville and VeraSage Trailblazer wrote Ron Baker and I about an idea he is noodling:
Since Service Level Agreements (SLAs) were killed earlier this year, we now refer to customer agreements as Knowledge Transfer Agreements (KTAs) since that title is a much more accurate statement of what we really do for customers.
In the spirit of being creative, I’ve come up with a list of KTA levels based on a steakhouse/restaurant theme.
- A level: The Palm (average dinner for 2 is $350)
- B level: Ruth’s Chris ($200)
- C level: Outback ($75)
- D level: Golden Corral ($25)
We have a "black card" level as well. It’s called Chef’s Table. One of my high school classmates (Todd Gray) owns a restaurant in Washington, DC called Equinox (which is consistently ranked in the top 5 restaurants in the DC area). Todd has a table that is literally in the kitchen. The normal waiting list for that table is several months. You pay $350 per person (plus wine pairing if so desired) and are served whatever Todd thinks is the freshest and best quality at that particular time. You have no idea what you will be eating; you just know it will be the best.
For about $1,000 (if you get the wine pairing), all you know is that you will be eating something and drinking some type of wine. What a concept!
You might be thinking: how could I ever get a customer to pay for Chef’s Table? For us it means becoming WAY more than just a software consultant/vendor. It means that we must create an incredibly valuable experience for our customers. Just like Todd does at Equinox.
All of our customers are in the small- to mid-sized (SMB) space so some examples of what I consider to be part of a Chef’s Table KTA are:
- Assist them with implementing a Results-Only Work Environment (ROWE)
- Teach them how to use project management
- Reduce their Information Technology costs by moving to Google Apps
- Assist them with implementing a strategy to leverage social media
- The list is almost endless!
Does anyone else offer their own version of Chef’s Table? And what does your KTA look like?
Great stuff John!
Ron Baker - 07/14/2010
Evolutionary biologists have proven that the more adapted (i.e., comfortable) you are in your existing environment, the less able you are to adapt to environmental changes.
Struggle is good for us. Rigidity is what organizations manifest when they are faced with either superior competition or outdated business models.
This is the history of business. New ideas, inventions, and business models from the tinkerer in the garage change the world, while rendering obsolete the existing modes of production, infrastructure, and business models.
The automobile replaced the horse and buggy, the calculator replaced the slide rule, and the personal computer replaced the typewriter, iTunes replaced CDs, and so on in a never-ending “perennial gale of creative destruction,” as described by economist Joseph Schumpeter.
Harvard professor Clayton Christensen writes:
Generally, the leading practitioners of the old order become the victims of disruption, not the initiators of it.
Change and creativity always take us by surprise. If it didn’t, we wouldn’t need it, because we could simply plan on it and incorporate it into our existing strategies and processes. Nassim Nicholas Taleb makes this very point in his book, The Black Swan:
We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we’d already know what a wheel looks like, and thus we could invent it.
The professions, however, have been slow to adapt to the realities of an intellectual capital economy. Never before has this mentality been such a hindrance to success in today’s rapidly changing, globalized marketplace.
Business Model Innovation
In a meeting with professor Clayton Christensen, former Intel CEO Andy Grove made the point “that disruptive threats came inherently not from new technology but from new business models.” Perhaps this is why Grove titled his own book, Only the Paranoid Survive.
I am defining a business model as follows:
How your firm creates value for customers, and how you monetize that value.
Clayton Christensen’s partner in his consulting firm Innosight is Mark W. Johnson, author of the compelling book Seizing the White Space. He points out that most successful innovative business models are forged by start-ups.
Johnson studied approximately 350 business model innovations in the past ten years, with more than 30 percent being enabled by Internet technology. Fourteen companies founded since 1984 have entered the Fortune 500 between 1997 and 2007 through business model innovation, including:
- Amazon.com
- AutoNation
- eBay
- Google
- Qualcomm
- Starbucks
- Yahoo!
Thinking about the history of innovation, creative destruction, and business models in the context of professional knowledge firms, in combination with the radical business model proposed by VeraSage—from “We sell time” to “We sell intellectual capital"—the diagram provides an interesting look at where any firm can be at a given point in time. Since competitive advantages are built based on effectiveness, not efficiencies, I have chosen to highlight each as the axes of the diagram.
Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future.
Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.
Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.
Innovators: As George Gilder wrote in Forbes, “Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.”
Innovators are firms that are willing to invest some of today’s profits into tomorrow, while at the same time sacrificing efficiency for effectiveness.
Innovation, creativity, and Total Quality Service are the antithesis of efficiency—ideas such as Google Time (where Google employees can spend 20% on innovation), experimenting with new ideas, investing in education, all reduce efficiency metrics.
But if firms do not make these essential investments they are simply coasting on their existing intellectual capital, and in today’s economy, knowledge becomes obsolete more rapidly.
Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective.
I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers.
Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is.
Firm of the Future or Firm of the Past?
Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right.
It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for.
It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect.
It requires an attitude of experimentation, not simply doing things because that is the way it has always been done.
It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.
As science fiction writer William Gibson quipped, “The future is here. It’s just not widely distributed yet.”
Skeptics will call for an incremental approach, which is how they maintain the status quo.
But how will these optically challenged skeptics make incremental changes to an existing business model that is already dying? By making it incrementally less dead?
The late economist John Kenneth Galbraith wrote, “All successful revolutions are the kicking in of a rotten door,” not—I would add—merely oiling the hinges to make it swing more efficiently.
There is no limit to what we can achieve, as long as we do not lose faith in ourselves. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.
The choice is yours.
Ron Baker - 07/08/2010
We have all heard the famous saying, often referred to as the McKinsey Maxim, named after the famed consulting firm: “What you can measure you can manage.”
This bromide has become such a cliché in the business world that it is either specious or meaningless.
Specious since companies have been counting and measuring things ever since accounting was invented, and meaningless because it does not tell us what ought to be measured.
Besides, has the effectiveness of management itself ever been measured? How about the performance of measurement?
Measurement for measurement sake’s is senseless, as quality pioneer Philip Crosby understood when he uttered, “Building a better scale doesn’t change your weight.”
The Triple Crown Criteria
In his book, From Worst to First, Gordon Bethune details how he was able to turn around the failed airline (which had filed for Chapter 7 bankruptcy twice in the preceding decade) between February 1994 and 1997, turning it into one of the best and most profitable airlines in the sky.
It is a remarkable story, and it illustrates the importance of utilizing leading key predictive indicators (KPIs) to focus the entire organization on its purpose and mission.
Bethune basically tracked three leading Key Predictive Indicators (KPIs), known as the “Triple Crown Criteria” in the airline industry:
- On-time arrival
- Lost luggage
- Customer complaints
What makes these three KPIs leading is that they measure success the same way the customer does. And that is critical because, ultimately, the success of any business is a result of loyal customers who return.
None of the three indicators would ever show up on a financial statement, but, as the airlines have learned over the years—by testing the theory—they have a predictive correlation with profits.
Is there a Triple Crown Criteria for PKFs?
Now that there are well over a thousand firms that have trashed timesheets, VeraSage Institute is proud to announce, based upon empirical evidence, the Triple Crown Criteria for Professional Knowledge Firms.
We are emphatically declaring that the following three KPIs are all your firm ever needs to track to predict future customer loyalty and buying behavior.
Think about it: If an airline can run on three KPIs, why can’t a PKF?
An airline is far more complicated than any PKF, which is what makes KPIs so powerful: they are measurements (or judgments) guided by a theory.
But the theory is the senior partner. It’s not just measurement for the sake of measurement. It’s measuring—and judging—what actually matters, to customers.
It’s defining the success of your firm the same way the customer does, just like with the airline KPIs.
The Three KPIs
Turnaround Time
Michael Dell likes to refer to the time lag between a customer placing an order and the company assembling and shipping the finished product as velocity.
We believe professional firms should also be diligent about tracking when each project comes in, establishing a desired completion date, and measuring the percentage of on-time delivery.
As Ed Kless always points out, a firm can measure “time spent” or “duration.” The latter is the only thing that matters to the customer, hence that’s what needs to be tracked.
This prevents procrastination, missed deadlines, and projects lingering in the firm while the customer is kept in the dark.
Imagine installing 360-degree webcams everywhere in a firm. Also imagine customers being able to log onto a secure Web site, type in their names and passwords, and the appropriate web camera would find their project and give them a real-time picture of it, probably laying on a manager’s floor or credenza awaiting review.
Would this change the way work moved through a firm? Would this hold the firm accountable for results, not merely efforts?
Customers don’t want to hear about the labor pains—they want to see the baby.
FedEx and UPS do exactly this; and in fact some law firms utilize intranets that provide their customers with real-time access to the work being performed on their behalf.
This one metric would go a long way towards mitigating most of the reasons customers defect from firms (not kept informed, feel ignored, and so on).
Value Gap
This measurement attempts to expose the gap between how much the firm could be yielding from its customers compared to how much it actually is.
It is an excellent way to reward cross-selling additional services, increase the lifetime value of the firm to the customer, and gain a larger percentage of the customer’s wallet.
Marriott International uses predictive analytics through its Hotel Optimization program. Marriott has developed a revenue opportunity model, comparing actual revenues as a percentage of optimal prices that could have been charged. It attributes the narrowing of this gap, from 83 to 91 percent, to this metric.
One CPA firm made this calculation part of its partner compensation model. What actions can your firm take to close the value gap?
High Satisfaction Day™
I am indebted to John Heymann, CEO, and his Team at NewLevel Group, a consulting firm located in Napa, California, for this KPI.
When John’s firm held a retreat for the purpose of developing their KPIs, the suggestion of High Satisfaction Day (HSD) was made.
An HSD is one of those days that convinces you, beyond doubt, why you do what you do. It could mean landing a new customer, achieving a breakthrough on an existing project, receiving a heartfelt thank-you from a customer, or any other emotion of exhilaration that makes you happy you got out of bed in the morning.
Sound touchy-feely? John admits it is; but he also says the number of HSDs logged into the firm’s calendar is a leading indicator—and a barometer—of his firm’s morale, culture, and profitability.
Is this too Simplistic?
No.
Compare the above KPIs to what most firms are measuring now—billable hours, utilization, realization, write-downs, write-offs, and other internally-focused metrics that have nothing to do with how the customer defines the success of their firm.
These metrics have zero predictive ability when it comes to future customer behavior. They are lagging indicators, not leading.
Stop measuring things that don’t matter, and focus on what does. The above three KPIs will work in any PKF—period.
VeraSage stands by this Triple Crown hypothesis for all PKFs.
Prove us wrong.
We’ll enjoy losing the argument, because it means we’ll learn something new.
Ron Baker - 05/27/2010
Hat tip to Jay Shepherd for pointing out the Wall Street Journal article, “Raise Your Prices!,” which Ed wrote about yesterday.
I finally read all of these articles this morning. They are all excellent, but one in particular stands out: “The Myth of Commoditization,” by Michael Schrage, a research associate wtih MIT’s Media Lab.
As readers of VeraSage know, we vehemently disagree with the notion that any product or service is a commodity. It’s a cop-out.
Well, sometimes someone says it better than you.
Please read Schrage’s article.
Ron Baker - 05/04/2010
Greg Kyte is the self-proclaimed “Champion of the Dissenters.” This is his third entry explaining why I’m wrong about VeraSage’s Quest to bury the billable hour and timesheet.
I have to admit, he’s starting to make a compelling point, causing me to rethink our entire approach. Perhaps there is a place for billable hours and timesheets?
Oh, Ron Baker, your naivety is so cute—the way that you regularly promote the fabrication that billable hours and timesheets retard people’s creativity. So untrue; so precisely wrong.
On Friday, an audit manager at my firm had an inspired proposal to boost our firm’s profitability. One of our clients with whom we have a 25-plus-year relationship has been required by its lender to have its financial statements reviewed rather than compiled for 2010. My colleague invited the client to lunch to discuss how this new requirement will affect them. We paid $60 for the three of us to go to lunch for an hour and a half, and—here’s the inspired part—both the manager and I billed the client for our hours. My rate is $200 per hour. My manager’s is $150. Ron, we just sold a $20 chicken marsala for $525! That’s a 600% return! That’s beyond a “fist pump price”; that’s a pelvic thrust price!
I know you won’t believe it, but this plan was hatched without any Google time. The creative force was the fact that she was ten hours behind her billable hour goal. The billable hour: a wellspring of creativity!
Ron Baker - 01/18/2010
On January 9, 2010, I received an email from Kim Foard, CPA from Billings, Montana that created an HSD for me—High Satisfaction Day—as we like to say here at VeraSage:
Your book, Professional’s Guide to Value Pricing, improved my client’s happiness and my success. While the financial rewards have been fun, the improved relationships are priceless!
Pricing on Purpose is next.
Kim Foard
Kim was kind enough to provide us with a case study for our Trailblazers section, reprinted below.
January 16, 2010
What We Want
As a door-to-door Cutco© knife salesman in my freshman year of college, I learned that people buy what they want; not what they need.
When asked for several knives to sharpen, one couple would present broken blades so dull soft butter was a challenge. While giving me hearty nods of approval that they were in need of knives and enjoying the presentation of tricks performed with the sharp knives from my sales kit, they would politely say, “No. No, thanks; we don’t want what you’re selling.”
The couple in the next house would struggle to find any dull knives in the sets of fine cutlery displayed in their kitchen. As they apologized for not being able to play along, I would make a little conversation, reluctantly begin the show, and then quickly navigate my way through the script. Without even asking for the order, my focus was on an exit strategy. They would reach over, touch my arm and exclaim, “Yes! We want to buy the biggest set!”
Only years later, when studying one of the greatest salesmen, Zig Ziglar, did I learn, “You can get everything you want in life, if you will just help enough other people get what they want.”
This is my story.
The days of my childhood were spent horseback in a sea of cowhides with a Dad who knew the way to confidence was by doing what others said was impossible. The evenings were spent in epic tales of adventure with a Mom who knew the portal to opportunity was by learning from the stories of others.
After high school, I turned down scholarships to pursue my dream of being a cowboy. Fifteen months later, I knew I didn’t have the same love of horses and cows as my dad! Yet, all of those years living the notion, “Where there’s a will, there’s a way” came in handy for a poor kid with a “new dream” of going to college. In the course of managing my fledgling business as a twenty-something entrepreneur, the counsel of an older client friend cut short my whining as he said, “Kim, your problem is not that you were born poor. Your problem is that you were born with ambition. Many are born poor and stay that way. You want something else.”
The “something else” was finally discovered twenty years later in a book written by Ronald J. Baker, Professional’s Guide to Value Pricing (with CD), Edition 3, published by Aspen Law & Business, 2001 [now out of print].
By starting with one client in a little Montana town of 2,500 population, appropriately named Roundup, the cowboy in me was enjoying the gathering of a small herd of loyal clients. They understood from the very beginning: I was in the business of selling dollars. I didn’t understand Value Pricing; I did understand the importance of finding 5 to 10 times my fee in benefit for them. In the early years, there was an Exit Conference with every single client to explain what had been done. That made quite an impression and they would say, “No one has ever cared enough to spend time with me, like this!” Spend time? Heck, no! I was investing time with them; I wanted a long-term relationship!
Then, one day, time had taken its toll on a ranch family and they were in the process of transitioning the next generation into the accounting function. I remember the excitement of working with the new twenty-something CFO, as we set up QuickBooks© and enjoyed a day’s worth of coaching and visiting.
In the course of adding families, processes, and infrastructure to the ranch operation, right in the middle of a seven year drought, there was a Net Operating Loss to be carried-back: Many thousands of dollars of benefit for a thousand dollar fee. To my surprise, I received a call from the new CFO, who had questions about the bill.
Remember, this was before Value Pricing, Fixed Price Agreements, Retainers and crystal clear Communication at the beginning of every project.
Sure enough, he was right. There was a line on his bill, and every other client’s bill, that read: Photocopies and Assembly—$75.00.
Made perfect sense to a bean-counter; we have overhead. After a few years in business, we have a history of expense; we can project that cost into the next year and we can reasonably estimate number of clients and projects for a given year. So, we do the math. $75.00 was a good number, all clients paid the same on any project and it, definitely, was a Fixed Cost to me. Not to the client. He wanted to negotiate that amount, downward.
In fact, he had counted the number of pages, and fasteners, applied the going Office Supply Store rate for those commodities and arrived at his number of $7.50. In his mind, he had been overcharged by a factor of 10. Ah, that “Perfect 10”; yet, this time it was viewed as being in my favor, not the client’s, and it was causing harm to our relationship!
He thought I was cheating him; I thought he was behaving stupidly. We were, both, on to “something”!
The value provided to the family for the last twenty years didn’t matter at that moment. In essence, he was a “new client” and deserved my respect. So, we began at the beginning.
Having read enough of Professionals Guide to Value Pricing to think differently and having found the CD in the back of the book with templates, I approached this “new beginning” with fervor. I had nothing to lose and everything to gain; a relationship hung in the balance!
There must be a better way to build relationships than: work hard; send bill. For twenty years, I had done what I had been trained to do by my accounting mentors. It worked, most of the time: 95% of the clients understood the value and were willing to be surprised by the bill. For a competitive perfectionist, that other 5% was the challenge, and at that moment I had one very irate customer on my hands, and my mind!
Change nothing; Nothing changes.
Insanity is doing the same thing over and over, expecting a different result.
Easy is hard; Hard is easy.
We get what we allow.
It was time for a change.
The insanity was tiring.
A new path was needed.
I had created this mess.
A single line on a bill was the proverbial straw that broke the camel’s back.
One more witticism became the mantra of the day, “Fake it until you make it!” At the time, all I had was a page of script titled, “Questions You Should Ask The Customer During The Fixed Price Agreement Meeting” and a burning desire to find a better way.
Today, those questions have been customized and internalized until they are at the center of every new beginning, and potential client relationship.
They look like this:
- What do you expect from me?
- What are your biggest worries?
- How do you see me helping with these challenges?
- What growth plans do you have?
- What role do you want your CPA to play in your business?
- How would you define quality service?
- Is a 100% Money Back Service Guarantee important to you?
- What would you consider as timely response to your accounting and tax questions?
- Why are you changing professionals?
- Are you concerned about any, one, issue that I should give special attention?
- Were you referred to me by someone?
- Are you Able To Pay for guaranteed exceptional value?
- Are you Willing To Pay a retainer in advance and the balance upon completion of services?
Forget about Perfect 10s; these are the Lucky 13!
As accountants, we will eventually need, and want, to answer this question:
- Are we Relationship Builders, or Paper Shufflers?
Paper, as a commodity, is cheaper by the case.
Relationships are priceless.
For those who want to debate whether the glass is half-full, or half-empty, handling commodities might be an excellent career choice. For those of us who wonder why so much attention is given to “half” of anything, “Creating and Capturing Value” is quite a noble profession!
Wholeness comes from tapping into the Universal Principle of abundance; our real potential is unlimited. Yet, this isn’t about us.
Communication is what the listener does. Are we listening to our clients? Do we really hear, and understand, what our customers want?
Oh, sure, they will grudgingly accept bills for the compliance work they “need” to have done. When they understand how much we care about them, demonstrated by how we actively listen to their dreams, they are open to new ideas. As they consider all of the many menu choices available to them, with a clear pricing structure designed to express the value of each one, and ultimately commit to partnering with us, the “want” is palpable!
Yes, that new CFO in charge of the family ranching heritage understood the Value in the Price (when I covered up the detail of the bill) and wanted me to understand that he wanted more of that simplicity. Why did it take me so long to get the horse in front of the carriage? Answer: Good judgment comes from experience; Experience comes from bad judgment!
Disciples of Value Pricing never hear “The check’s in the mail.” In fact, because “the checks are in the drawer”, we manage risk, schedule our days, attract quality clients, stumble into opportunities, enjoy open communication, reap financial rewards, and tie “Ribbons and Bows” around each and every project on our way to building relationships.
I have learned a deep respect for one of Goethe’s couplets:
Whatever you can do, or dream you can, begin it.
Boldness has genius, power, and magic in it.
In our world of technological advances, “www” has become the gateway to infinite possibilities. If we will decide “What We Want” and, then, offer that with passion to others, the result is guaranteed to be a “Win Win Win”: for Customers; for Us; and, for the Whole Wide World!
Best regards,
Mr. Kim Foard, CPA
It’s rare to get cowboy poetry from a CPA, so thanks again Kim for making our day.
More importantly, congratulations to you for having an open mind, looking for a better way, and contributing to the dignity of our profession by doing the right thing for your customers.
Reading Kim’s story was another HSD!
Ed Kless - 12/22/2009
(or Do you believe in God?)
For the past few weeks I have been involved in a dialogue of sorts on the TEDtalks LinkedIn Group about whether the value of an idea is in the idea itself or rather in the implementation.
This led to a pithy, but profound exchange between myself and Wan Chi Lau. To spare you the details of the other parts of the conversation, I have excerpted just the relevant threads of the conversation. Thanks, Wan for the permission to reprint your comments.
| Ed | Without an idea, you have nothing to implement. |
| Wan | Actually I would disagree...the evidence is all around us. The entire Universe is one big implementation without any "idea." We are of the Nike mantra...."Just Do It." |
| Ed | Only if you are an atheist. I am not. |
| Wan | Well, clearly I am :-) |
This brief exchange is the whole essence of the argument and I am curious to know if the following hypothesis is true: If you believe the value is in the idea, then you are likely to be theistic; if you believe the value is in the implementation of the idea, then you are likely to be atheistic.
Ron has written extensively about this in these two posts:
Thoughts?
Ron Baker - 09/27/2009
Pat Lamb commented on my recent post on Lean Client Service.
Since I don’t want to repeat the entire post along with his comments, I will just respond to his comments, as shown below in all capital letters.
On the distinction between “value billing” and “value pricing” Pat writes:
[I APPRECIATE THE DISTINCTION AND APOLOGIZE FOR THE ERROR. BUT TO ME, THE CRITICAL ELEMENT IS THE PRICING AND SUBSEQUENT BILLING SHIFT TO THE LAWYER OR OTHER KNOWLEDGE WORKER THE NEED TO PRODUCE THE OUTPUT AT THE LOWEST COST IN ORDER TO MAXIMIZE PROFIT MARGINS].
This comment explains most of the differences between Pat and me.
Pat, you seem to have a “penetration” pricing strategy, which means any costs you drive out of the system are passed along to your customers, like Wal-Mart.
I think this is a strategic error for Valorem, especially if you offer “alternative” pricing and great customer service.
At worst, you should have a “neutral” pricing strategy, or better yet, a “skim” strategy. Little wonder you are still arguing for cost savings everywhere. You should re-read the story from Ben & Jerry’s from my book Pricing on Purpose (which you reviewed on Amazon and gave 5 stars), where they discuss their pricing epiphany. [In fact, I’ve reproduced it at the end of this post].
Your penetration strategy dictates your views, while most of the firms we work with are implementing a skim price strategy.
On the issue of “professional service” vs. “professional knowledge” firm, Pat writes:
[TO ME, A DISTINCTION WITHOUT A DIFFERENCE].
Really? Then Peter Drucker was wrong about knowledge workers, and the enormous differences between them and industrial/service workers? You can apply the same metrics to a KW as an industrial or service worker?
The difference is enormous, and I’m not just talking about the name. Knowledge workers own the means of production, and they are the system when it comes to many functions. I side with Drucker on this one.
If we can’t agree on this, then nothing else I say will matter to you.
Pat writes:
[IS YOUR POINT THAT WE WANT TO DO THE RIGHT THINGS INEFFICIENTLY? IF SO, I BEG TO DISAGREE].
No, not my point at all. My point is that in many cases, as I cite in my post, at the margin trading less efficiency for more effectiveness is a wise strategy.
Doing the right things efficiently, or to the best of our abilities, is just plain common sense. I don’t mow my lawn with my BB gun. I’m saying that your ruthless attention to efficiency is not a competitive advantage, because despite your penetration price strategy, most law firm clients are not price sensitive.
Pat writes:
[I THINK THIS IS WHERE THE PARSING OF WORDS GETS EXTREME, RON. FRED AND I LIVE I A WORLD WHERE PEOPLE KEEP SCORE AND NEITHER OF US IS MAKING CEMENT LIFE JACKETS. WE ADVOCATE, AND LIKE IT OR NOT, IT IS AN EVERYDAY PART OF THE BUSINESS WORLD].
Keeping score is one thing, but keeping score doesn’t make you more efficient. That’s like arguing measuring yourself more accurately will change your weight.
I’m not against keeping score (hell, I’m a CPA), I’m against keeping score of the wrong things.
Pat writes:
[FRED AND I, AMONG OTHERS, HAVE USED THE BUGGY WHIP MAKER ANALOGY TO DISCUSS BIGLAW. BUT THE PRODUCT BEING SOLD BY LAWYERS IS RESULTS—SOLVING CLIENTS PROBLEMS. I DON’T KNOW OF A CLIENT WITH A PROBLEM WHO WOULD ARGUE THAT HER LAWYER’S ABILITY TO ACHIEVE A RESULT AND MAKE THE PROBLEM GO AWAY IS AN ANTIQUATED BUSINESS].
I’m not arguing that lawyers will go the way of buggy whip makers, though other thoughtful people are. I’m saying a focus on efficiency at the expense of innovation and creativity will make you irrelevant, or less able to create services that customers value.
Pat writes:
[EFFICIENCY DOES NOT ALWAYS NEED TO BE MEASURED, BUT ARE YOU REALLY ARGUING AGAINST DOING QUALITY WORK FASTER AND CHEAPER?]
Please give me an example of an efficiency metric that is not measured?
When you attempt to do this you will make my point about the difference between a measurement and a judgment.
Even your definition contained in your comment further below is a measurement, where you write:
[EFFICIENCY, AT LEAST IN THE LAW, IS GREATER OUTPUT—RESULTS—PER UNIT OF TIME].
Looks like a measurement to me. You can measure the output, but the results must be judged.
Further, it’s greatly flawed, especially from a value/pricing standpoint.
Are you saying the Jonas Salk’s polio vaccine is worth the amount of time it took him to develop? Are you saying that if it took him decades to develop it would be less valuable?
Sure, we would have loved it if he came up with it sooner, but we are dealing with human beings, not machines. You seem to think lawyers can run at 100% efficiency all the time, or at least your measurements argue for that logic. I reject this as industrial thinking.
Pat writes:
[BUT A DOCTOR DOESN’T WASTE TIME NEEDLESSLY. IT IS BAD FOR THE PATIENT’S HEALTH].
Again, Pat, this depends. I want my doctor to spend as long with me as necessary for a complete exam, diagnosis, etc. Ever been to a Dr. who stands by the door ready to rush out to the next patient, probably because some Lean consultant imposed a patient per hour quota on them? Not very effective. The Mayo Clinic does not do this, for this very reason.
Now if you’re saying that a doctor shouldn’t waste time in surgery, I have no argument. But even if he does, that’s his judgment, and if I trust him and it leads to a more effective result, why do I care? Maybe he needed a consult, or to think about a procedure more carefully. Are you really arguing that there’s no room for inefficiency? Then we really need to stop this debate.
Pat writes:
[THIS IS A GREAT EXAMPLE THOUGH. TOY STORY AND OTHER COMPUTER GENERATED CARTOONS ARE JUST AS GOOD BUT PRODUCED AT A FRACTION OF THE COST, ALLOWING THE PRODUCERS TO INVEST MORE AT THE IDEA DEVELOPMENT STAGE AND STILL MAKE MORE MONEY].
I doubt Pixar movies are cheaper to make than Disney’s, given the price of human capital. Pixar wasn’t about lowering the cost, it is all about making a more awesome (effective?) animated movie.
Even if I accept your argument that they did it at a lower cost, did they pass that cost savings onto the moviegoer?
Ha! They skimmed it for themselves. This difference in pricing strategy, again, explains most of the differences in our worldviews.
Pat writes:
[LEAN IS ABOUT LOOKING AT PROCESSES TO SEE WHAT VALUE THEY PRODUCE FOR CLIENTS. ARE YOU SAYING THAT WE SHOULD BE INDIFFERENT TO THE USE OF TECHNOLOGY IN DOCUMENT REVIEW FOR EXAMPLE, EVEN THOUGH STUDY AFTER STUDY HAS SHOWN IT PRODUCES EQUIVALENT RESULTS AS HUMAN REVIEW FOR A FRACTION OF THE COST?]
No, I’m not saying that. I’m saying that you using technology for document review does not convey a competitive advantage, since your competitors are using it too. It’s like having restrooms.
I rather have you focus on how to create more value for your clients than worrying about how you can increase efficiency by 1%.
Pat writes:
[SO WE’D RATHER HAVE LARGE NUMBERS OF EXTRA COMPUTERS FOR EXAMPLE, RATHER THAN TRYING TO PURCHASE ONLY THAT WHICH IS NEEDED? WE LIKE TO HAVE EXTRA BODIES AROUND FOR THE RARE TIME THEY ARE NEEDED RATHER THAN LOOKING FOR ALTERNATIVE APPROACHES?]
This is not really addressing the point of the hammer example. That was made to prove that the efficiency measurement did not convey the underlying realities of the situation.
But to address your point, I do believe your firm should have spare capacity. Too many firms run at full tilt, they burn out their team members, don’t have time to effectively market for better customers, and are always playing catch up on hiring at the last minute.
Spare capacity is a good thing for knowledge workers, giving them time to invest in marketing, social media, education, thinking, creating, innovating, and just recharging their batteries.
Pat writes:
[NO, BUT YOU WOULD LOOK AT THE COST OF TRANSPORTING THE MUSICIANS FROM ONE ENGAGEMENT TO THE NEXT, OR THE COST OF PROCURING THE NECESSARY INSTRUMENTS FOR THESE PEOPLE TO PLAY THEIR EXCEPTIONAL LEVEL. YOU ARE LOOKING AT THINGS FAR TOO NARROWLY.]
Oh come now, Pat. Are you really going to transport these folks on Southwest because it’s cheap? Again, this is a mechanical view of knowledge workers. Most airplanes’ business and first-class are filled with business passengers. I wonder why?
Pat writes:
[RON, YOU WRITE AS IF PROCESS AND JUDGMENT ARE MUTUALLY EXCLUSIVE. THAT MAY TRUE IN THEORY OR IN YOUR WORLD. I CAN ASSURE YOU, HOWEVER, THAT IN THE WORLD MY CLIENTS OPERATE IN, THEY ARE INTEGRATED. YOU HAVE TO PROVIDE GREAT JUDGMENT AT A LOW PRICE.]
I work in the real world, Pat. I’ve transformed thousands of practices around the world. I’m able to do that because the theories I use are sound and predictive. Accusing me of not being in the real world lends zero credence to your arguments.
You also seem to think that customers only care about lowest cost. Do you buy the cheapest toilet paper? Customers aren’t price sensitive, they are value sensitive. But given your penetration pricing strategy, maybe you are dealing with the most price sensitive segment of the market.
In any case, it does not alter the fact that a judgment is far different than a measurement. Enron was not theoretical, it was a perfect illustration of the difference between a measure and a judgment.
Pat writes:
[RON, I JUST THINK THE MAJORITY OF PEOPLE ARE GOING TO REJECT YOUR ARGUMENT THAT WE SHOULD BE INDIFFERENT TO COST. NO ONE CAN AFFORD THAT THESE DAYS].
I’m not arguing to be indifferent to cost. Your costs should be driven by your price (not the other way around!), and your price should be driven by the value you create.
Again, if we can’t get past this basic economic fact, this debate is futile.
In the price-led costing world, your costs are determined up-front. You can only recover the costs you incur if you can command a price that covers those costs, plus profit. The only way to do that is to create value above the price, so your customer makes a profit on the transaction as well.
That, by the way, is how the real world works. It doesn’t work on a cost-plus basis, otherwise GM wouldn’t be in bankruptcy.
Pat writes:
["TOTALLY FOCUSED” MY POINT EXACTLY, IF YOU FOCUS ON ONE OR THE OTHER TO THE EXCLUSION OF THE OTHER, YOU LOSE. BOTH NEED TO BE PURSUED].
It depends on your pricing strategy. BMW of course cares about costs, but not to the point that it reduces the value of its cars. If customers value your product enough, they will pay for high costs, and even inefficiency (again, see the Ben & Jerry’s pricing epiphany below).
Pat writes:
[BUT EVEN THE BEST AIRLINES PAY ATTENTION TO COST, BUYING OIL WHEN IT IS CHEAPER, FOR EXAMPLE, OR HEDGING INCREASED OIL PRICES].
Sure, so what? Look at how they price. They change their airfares 11 million times in one day in the USA. They don’t do this because costs are changing that often, but because the value of the flight is changing the closer you move to take off.
Pat writes:
["IN AND OF ITSELF.” AGAIN, YOUR OWN WORDS SHOW YOU ARE CASTING THIS AS EITHER/OR WHEN I CERTAINLY DID NOT AND NO BUSINESS PERSON I KNOW OR HAVE HEARD OF DOES EITHER].
I stand by the statement, and you haven’t successfully refuted it. Efficiency, in and of itself, will not convey a competitive advantage.
Pat writes:
[BUT THEY DO HAVE PIANISTS ONLY DURING PEAK HOURS, NOT EVERY HOUR THE STORE IS OPENED].
It’s not that the dog dances poorly, it’s that he dances at all. No Lean/Sig-Sigma consultant would dream of putting pianos in a Nordstrom, even during peak hours. It’s not efficient.
Pat writes:
On doing the Right Thing, not Doing Things Right [IT SEEMS WISER TO ME TO DO THE RIGHT THINGS THE BEST WAY, OR AT LEAST A BETTER WAY].
Forget about efficiency. Worry about effectiveness. [IN MY WORLD, RON, I HAVE TO WORRY ABOUT BOTH. IF I DIDN’T, I WOULDN’T HAVE CLIENTS].
But which drives success? Effectiveness does. You have to worry about both to a point, but when your efficiency interferes with your effectiveness, which has to go?
Pat writes:
[BUT SOUTHWEST MORE THAN MOST ANY OTHER BUSINESS I KNOW LOOKS TO STRIP OUT “STUFF” THAT DOES NOT IMPROVE THE CUSTOMER EXPERIENCE, WHICH IS THE VERY DEFINITION OF LEAN].
Yes it does, but they don’t use Lean, or any other management fad. They’ve rejected those since they were founded. My point is that Lean isn’t the only way to eliminate waste.
Pat writes, in response to our replacements for Lean/Six-Sigma:
[I AGREE WITH ALL THESE CONCEPTS, NONE OF WHICH ARE FUNDAMENTALLY AT ODDS WITH THE CORE CONCEPTS OF LEAN. AGAIN, THEY ARE NOT MUTUALLY EXCLUSIVE].
Well, in the real world, I can tell you that companies I’ve seen use Lean/Six-Sigma have focused on the one while driving out the other.
Leadership attention is a fixed resource, and you can only have so many iniatitives. Lean and Six-Sigma is a low-value undertaking, compared to focusing on creating and capturing value.
Every study undertaken proves that a 1% increase in price adds far more to the bottom line that a 1% improvement in reducing costs, or even rainmaking.
Pricers have an axiom: Innovate for growth, price for profit. This is why Google gives 20% Google Time, which I notice you didn’t comment on? That’s not very efficient, so why do they do it?
To give a real world example: I know a PKF that uses Lean/Six-Sigma, it even has Black Belts in Six-Sigma on their team (yes, it’s a real designation). After one year of implementing Lean/Six-Sigma here are the results:
- Historical Metrics:
- Increase in Realization: 6.0%
- Decrease in Write-offs: 51.6%
- Increase in Revenue: 1.9%
- Increase in Cash Receipts: 10.0%
- Decrease in Charge Hours*: 7.50%
- Increase in Hourly Rate: $17/Hour
Now, I’ve been working with a similar sized firm on implementing Value Pricing, and over the same past year they report a 25% increase in revenue, and an even greater increase in profit.
Which result would you rather have? You may answer both. Ok, but I think you will find that low-value ideas crowd out high-value ideas, since they are easier to implement.
Your own comments tell me that you find value pricing very hard. It is, damn hard. It’s also a high-leverage activity, so is creating more value.
It’s much easier to sit around and gaze at our navels and discuss how to increase output per hour by 1%. It’s just nowhere near as profitable.
Pat writes:
[RON, WHEN WE FIRST MET, I ASKED YOU HOW YOU WOULD APPLY YOUR VALUE PRICING MODEL IN THE CONTEXT OF A CLIENT WHO HAD JUST RECEIVED A COMPLAINT AND WAS LOOKING AT 3 LAW FIRMS WHO WOULD HANDLE IT, TWO OF WHICH WERE PROPOSING SPECIFIC BUDGETS. IN MY WORLD, THAT PROPOSED PRICE WOULD BE WHAT THE CLIENT LOOKED TO AS THE BOGEY YOU WOULD HAVE TO MEET OR BEAT. INSTEAD OF RECOGNIZING THAT REALITY, YOU SHIFTED THE DISCUSSION TO THE THEORETICAL BENEFITS OF VALUE PRICING, MUCH AS YOU HAVE DONE IN THIS DISCUSSION BY FOCUSING ON ONLY CERTAIN ASPECTS OF WHAT LAWYERS DO. REALITY IS TOUGH THING TO DEAL WITH, BUT IN POSTING ABOUT THE POSSIBLE VALUE OF LEAN TO CLIENT SERVICE, I WAS SUGGESTING THAT LAWYERS WOULD BENEFIT FROM A CRITICAL ANALYSIS OF THE MANNER AND PROCESS BY WHICH THEY HANDLE ALL ASPECTS OF MATTERS FOR CLIENTS. THIS DISCUSSION HAS ONLY REINFORCED MY VIEW OF THE VALUE TO THAT CRITICAL ANALYSIS].
Again, Pat, if you don’t understand the value that you create then how will your customers? Taking a budget as a price is a serious mistake, unless of course you really do have a penetration pricing strategy.
You seem to think that all customers care about is low price. This is nonsense on stilts. I’ve talked to hundreds of General Counsel who confirm this view, and elasticity studies by economists back it up.
They want to understand value, and if firms can’t do this, then the only thing left to discuss is price and/or hours.
Even Fred Bartlit doesn’t have a “penetration” pricing strategy, as I’ve read he’s turned away a case at $5,000 per hour. What customer in their right mind would be willing to pay that?
A customer looking for value. That’s not theoretical, that’s the real world.
Focus on your value and your customer service, and stop thinking you can price for 100% efficiency in a knowledge firm (and don’t make them fly on Southwest for crying out loud).
Your people aren’t machines, and I’ll let Ben & Jerry make my point:
The history of business is the history of epiphanies. Sometimes the fog clears up, and the right path is seen. This certainly happened—with respect to pricing—for Ben Cohen and Jerry Greenfield, founders of Ben & Jerry’s ice cream. Before they sold the business in 2000, to Unilever, the British-Dutch food company, they wrote an essay in 1997, titled “Bagels, Ice Cream, or...Pizza?” in which they explain their “famous pricing epiphany”:
Each year we would break even and say we needed only to do a little more business to make a profit. Then the next year we’d do a lot more business and still only break even. One day we were talking to Ben’s dad, who was an accountant. He said, “Since you’re gonna make such a high-quality product instead of pumping it full of air, why don’t you raise your prices?”
At the time we were charging 52 cents a cone. Coming out of the ‘60s, our reason for going into business was that ours was going to be “ice cream for the people.”
Ben said, “But Dad, the reason we’re not making money is because we’re not doing the job right. We’re overscooping. We’re wasting ice cream. Our labor costs are too high—we’re not doing a good job of scheduling our employees. We’re not running our business efficiently. Why should the customer have to pay for our mistakes? That’s why everything costs twice as much as it should.”
And Mr. Cohen said, “You guys have to understand—that’s human. That’s as good as people do. You can’t price for doing everything exactly right. Raise your prices.”
Eventually we said, either we’re going to raise our prices or we’re going to go out of business. And then where will the people’s ice cream be? They’ll have to get their ice cream from somebody else. So we raised the prices.
(Quoted in The Book of Entrepreneurs’ Wisdom, edited by Peter Krass, John Wiley & Sons Inc., 1999, pp. 462-463.)
I don’t expect to alter your view on any of this Pat, and that’s not why I’m debating you.
I’m actually using this debate to illustrate how obsolete the industrial/service model thinking is in a knowledge economy.
Our metrics come from Frederick Winslow Taylor in the late 19th century, and they are obsolete with respect to knowledge workers.
That said, I truly appreciate your debating skills. I, of course, believe the empirical evidence supports my view.
The market, ultimately, will decide, and I have faith it will make the right decision.
Ron Baker - 09/08/2009
Thank you to the Minnesota Society of CPAs for publishing my book review on the Mayo Clinic, and the difference between efficiency and effectiveness.
Ron Baker - 07/24/2009
The recent book review of Reinvent Your Enterprise has sparked a fantastic discussion on the difference between efficiency and effectiveness, especially in a Professional Knowledge Firm (PKF).
Senior Fellow Paul Kennedy, of OBK fame in Great Britain, joined the discussion in an email to me explaining the obk simple management system™.
As OBK is a true Firm of the Future, I was excited to share Paul’s methodology. I only wish more PKF leaders understood the difference between knowledge and manual/service workers, efficiency and effectiveness, and a measure vs. a judgment.
Obviously Paul Kennedy does. Study the following. If you’re smart, implement it, or something similar to it.
Thanks for [the book review] Ron.
I have been giving this some thought about efficiency vs. effectiveness and I will send you some notes. However, the underlying issue if I have read the article correctly is how to manage a knowledge worker (KW) or can KW’s be managed?
I had thought that this debate had ended. That is—KWs are more led than managed. At obk we have developed the obk simple management system™ which is laughingly simple but seems to work. It is about aligning the skills of a KW to business objectives and then coaching them. It goes like this:
Step 1. Everybody has a job and every job has a body. This involves designing a functional organisation chart with a “position contract” in each box ([Michael] Gerber style). This is business object orientated.
Step 2. Each position contract describes desirable outcomes, qualitative performance expectations and cross refers to an assessment form (see step 3 below).
Step 3. We design an assessment form for each KW. This is a short list of judgement criteria that assesses how well the function is being discharged. Against each criteria (usually between 5 and 10 headings) is 2 columns. One for self assessment and one for manager assessment. The KW and their manager score how well the criteria point is being done / performed / achieved, using 1 = low and 5 = high. The criteria headings can be anything you like but in our case includes:
- Development of relevant Human Capital
- Contribution to firm’s structural Intellectual Capital (IC)
- Consistency with firm’s core values
...Among others
Step 4. The KW and their manager have a 15 to 20 minute chat about their scores on a regular basis (sometimes weekly, sometimes monthly)
We have been experimenting with this system in the obk lab for some time and we have a number of clients using this system. What we have learned is:
- When you present a position contract describing desirable outcomes and with qualitative performance expectations some KW don’t want the position! (This may explain why management has been so frustrated with this KW for so long)
- Others say “to get to that standard I need help” (also good because its management’s job to provide help in terms of inspiration, tools and training).
- When assessment forms are completed we have observed a number of things:
- When a KW scores themselves low but their manager scores them high—the KW is pleased and their work is recognised (A good thing according to Blanchard’s One Minute Manager and Baker see Page 64 of The Firm of the Future—the 4 reasons why people go to work).
- When a KW scores themselves high but their manager low—also good because it means we are now at stage 1 on the progress ladder. Most managers never get to this stage with their KWs and can therefore never make progress.
- Whenever a score is less than 5 the conversation is about how can we get you to a 5? In other words this becomes a coaching process.
- The coaching chat plans and monitors the KW’s personal development.
At obk we have badges (Boy Scout style). We use these badges to define and test competence in skills required to create value for our customers. These badges may be technical or may relate to personal skills such as listening or speaking. Our KWs target and acquire these badges as part of their development. Their personal development is therefore aligned to our business needs.
This system works for us and for others where it has been introduced. In getting clients to use this system we have to educate them to make judgements. To get them to tell their KW’s how they feel without the need for justifying why they feel the way they do. We do not use measurements unless they can be directly related to KW performance, e.g., a salesman picking up new customers.
I think the key to making this system work is the environment in which this management system sits. This environment of course is the function of leadership and this is the key to getting more from KWs.
In my opinion, this is a far easier framework than the one laid out in the Reinvent Your Enterprise book. I can always count on Paul to shave with Occam’s Razor.
We’d love to hear what others think of the obk simple management system™.
Ron Baker - 06/01/2009
Thanks to Chris Jones of PA Consulting Group in Great Britain for passing this along.
Apparently, Deloitte has a newsletter, The Value Habit. Volume 9 has an article, Help Wanted: Chief Value Officer: Creating value is a full-time job.
It’s an excellent article, and we believe, an even better idea.
The genesis of this idea was from discussions with Paul Kennedy and the late Paul O’Byrne (sorry, I still choke up writing it that way), of OBK.
They made a comment that really stuck with me on a flight back from visiting them in 2004.
They were one of the first firms to have formed a pricing council, probably back in 2001-2002.
After running this council for a year or so, they said that they were becoming too focused on price, and value was being ignored.
I could see how this could happen, and since value determines price, maybe we needed to focus more clearly on the ultimate objective.
I knew there existed among large companies Chief Pricing Officers, Chief Revenue Officers, Yield Management Groups, Revenue Management Groups, even BMW had a Chief Experience Officer.
But I couldn’t find any company, anywhere, that had a Chief Value Officer.
Then in 2005, I presented to a firm (Ward Wilson) in New Zealand, strongly advocating they appoint a CVO.
They did later that year, Brendon Harrex, who now has his own firm.
In my book, Pricing on Purpose, I profile Brendon as the world’s first CVO, since I couldn’t find one anywhere before this time.
The idea caught legs, and now we know of probably a dozen firms that have appointed a CVO.
Who’s in charge of value in your firm?
Oh, and here’s a question for Deloitte: Do you have a CVO?
If so, why do you still think that time = value?
Ron Baker - 05/27/2009
Last Friday, I—along with my father—had the pleasure of visiting Trailblazer Brains on Fire in Greenville, South Carolina.
This is an amazing agency, which as of January 1st of this year trashed its timesheets. This initiative was pushed through by Kathie Conway, Keeper of the Cash, and Brandy Amidon, Princess of Particulars.
They were able to achieve this after reading the Journal of Accountancy Firm of the Future article from November, 2008, along with The Firm of the Future book.
Very few firms that we know of have been able to accomplish this feat without at least attending a seminar, or hiring consulting help.
After a great lunch, we sat down for an interview on trashing timesheeets. Some of the questions came from people who follow @BrainsOnFire on Twitter, and some were from Cathy and Brandy.
You can listen to the two-part interview on the Brains on Fire blog.
Thank you Cathy, Brandy, and the rest of the team at Brains on Fire—you are true pioneers and it was an honor to meet you. I’m only sorry I didn’t get to meet Mud.
Ron Baker - 05/18/2009
What would you think of a company that had the following characteristics and beliefs?
- No official structure, organization chart, no business plan, or company strategy; no mission statement, long-term budget, fixed CEO or human resources department (don’t need a mother and father of everyone in the company); no career plans, job descriptions; no one approves reports or expense accounts, and supervision or monitoring of workers is rare indeed.
- Instead of dictating [our company’s] identity, [we] let our employees shape it with their individual efforts, interests, and initiatives.
- On-the-job democracy isn’t just a lofty concept, but a better way to do things. ...People are considered adults in their private lives, at the bank, at their children’s schools, with family and among friends—so why are they suddenly treated like adolescents at work? Why can’t workers be involved in choosing their own leaders? Why shouldn’t they manage themselves? Why can’t they speak up—challenge, question, share information openly?
- If we have a cardinal strategy that forms the bedrock for all these practices, it may be this: Ask why. Ask it all the time, and always ask it three times in a row.
- We have been known to place ads reading: “We have no opening but apply anyway. Come and talk about what you might do for us, and how we might create a position for you.”
- [The company’s] Lost In Space program, assumes young recruits don’t know what they want to do with their lives. So do what you want, move where you want, go where your interests take you. At the end of year, anyone you’ve worked for can offer you a job.
- Telling people that the company trusts them and then auditing them makes it impossible for them to feel secure. ...We don’t require expense accounts because of what they say about character. We’ve learned that peer control is as effective as reporting and auditing. ...Even in cases of fraud, we shun audits or policing procedures because we feel that responsibility and peer interest are stronger than any internal controls (and that was before the collapse of Arthur Andersen, the king of audits and controls!).
- Most people flourish under freedom, flexibility, and responsibility. Most who have left [the company] have been managers.
- No management works quite like self-management. And working at [the company] means self-managing as much as possible. It isn’t nearly as frightening as it sounds. In the end, it’s self-interest at work. It requires conceding that managers don’t—and can’t—know the best way to do everything. People who are motivated by self-interest will find solutions that no once else can envision. They see the world in their own unique way—one that others often overlook.
- The world desperately needs an “Age of Wisdom,” and workplaces would be an inspiring place to start. At [the company] we have little to teach and even less to “sell” in a packaged form. We’re just a living experiment in eliminating boredom, routine, and exasperating regulations—an exploration of motivation and passion to free workers from corporate oppression. Our goal is helping people tap their ‘reservoir of talent’ and find equilibrium among love, liberty and work. ...Once people learn to do that...I know we’ll be alright.
After a speech the owner of this company gave, he was asked, “...Can you please tell us what planet you’re from?”
These beliefs defiantly challenge the conventional wisdom of management practices. I’d love for the recent author of a letter to the editor of the Journal of Accountancy to read this. If he thinks timesheets are necessary for control, he’s deluding himself.
The above forces us to challenge nearly everything we think we know about how to properly run an organization. This 50-year old company, by the way, employs 3,000 people in three countries (some of them union members); engages in manufacturing, professional services, and high-tech software; and had revenues of $160 million in 2001—up from $35 million in 1994. If you had invested $100,000 in this company 20 years ago, it would now be worth almost $6 million.
When I discuss this company in presentations, I am met with a staring ovation of disbelief. This visionary leader knew what type of future he wanted for his company, and he was willing to pay the price to achieve it.
Is this the type of firm—and leadership—you would want one of your children to work for?
In the spirit of adventure and curiousity, I implore you to read the two books by Ricardo Semler and discover for yourself the possibilities of creating a better future: Maverick: The Success Story Behind the World’s Most Unusual Workplace; and The Seven-Day Weekend: A Better Way to Work in the 21st Century.
If you’d like to see Ricardo Semler for yourself, watch this presentation at MIT World (about 48 minutes).
Meet a real revolutionary who doesn’t just talk about the pace of change; he creates it everyday. There’s many lessons here for professional knowledge firms.
Ron Baker - 05/02/2009
Two interesting articles came out this past week on the problems facing the legal firm’s business model.
When the intellectuals at Knowledge @ Wharton write ”It’s Time for Law Firms to Re-Think Their Business Model,” you know something big is happening. Academia tends to be a lagging indicator, as many folks have been pointing out the flaws in the billable-hour-pyramid-leverage model for decades.
Still, it’s worth reading, not only for the problems with hourly billing, but also why the partnership model needs to be revamped.
Our problem with the partnership model is it’s one based on broad-consensus, and as Margaret Thatcher was fond of pointing out, “Consensus is the absence of leadership.” Combined—hourly billing and partnerships—these two factors are responsible for the lack of innovation within legal firms.
To be innovative, one needs time to think, and in the billable hour model that’s “non-billable” time, an anathema. So all of the knowledge companies that provide anywhere from 15 to 20 percent free time to work on what you want, such as Google, Gortex, 3M, aren’t emulated by PKFs because of this mentality.
The second article is from Down Under, The Australian Financial Review, ”Lawyers in dock over hourly bills.” (Thanks to John Chisholm and Paul Dunn for passing this along).
This article cites a survey by the Australian Corporate Lawyers Association that found only 1 percent of corporate counsel thought hourly billing was the best approach to pricing! Then is states this:
Major law firms say the are open to different models, but that no better alternative had been proposed.
Are they kidding? Look around the rest of the business world, and you’ll discover all sorts of pricing paradigms.
This is clearly letting the perfect be the enemy of the good. The logic seems to be, since we can’t find a perfect alternative to the hell of the billable hour—which most everyone despises—we’ll stay with what we know.
The article cites a partner from a major law firm saying there are no agreed common standards for value billing. Well, duh. That’s because value is subjective, and trying to standardize it is insane.
Are they waiting for a formula, like hourly billing?
A couple of alternative firms have started-up Down Under, Optim Legal and Advent Lawyers, that operate on a fixed-price model.
Yet the problem with these models is they’re all about “lower price,” not great value to the customer.
Don’t get me wrong, I’m not against a low-cost business model, and if that’s what you want to do strategically, go for it. But my guess is most readers of this site aren’t interested in competing on price but rather value.
As one General Counsel says:
The focus for us is not on costs for costs’ sake, but on value.
Unless you want to be Wal-Mart, firms should focus on maximizing customer profit.
Loosely defined, customer profit = Value - Price. Most people don’t think about customer’s making a profit, but they surely do from every transaction, otherwise it wouldn’t take place.
In-house counsel is screaming for value, not low price.
The smart law firms know this; the dumb ones price less than even hourly billing.
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