In her DETalk, associate at John Chisholm Consulting, Jess Hadley posits that the only problem with value pricing is that not enough people know about it. It’s not quantum physics, in fact it makes complete sense even to people who have never read a business book in their life. So, how is it that many professionals don’t even know that there is a valid alternative to the dated and dehumanizing practices associated with the time-based billing model?
W. Michael Hsu of DeepSky talks about his personal struggle while searching for his (and his company’s) Why.
In this DETalk he explains the process that he went through to discover that his personal Why - to provide the younger generation the means and support to be great - was not just inline, but also inseparable, with his company’s Why - to provide entrepreneurs with the knowledge and confidence to be great.
He further suggested that the role of professional knowledge firms should really be seen as becoming the How to their customer’s Why.
They promise it will be “a podcast like no other.” The THRIVEcast begins in July 2011, brought to you by the innovative people of the CloudSolutions Alliance.
Jason and Greg will take you on a journey of learning more about our profession, with a twist of dysfunction and humor.
Last Sunday, my wife and I brought my son, Sean, and daughter, Cara, to the Imagination Movers concert at the Verizon Center just outside Dallas. To coin a phrase, a good time was had by all.
For those of you not familiar with the “Movers” (as we in the hip-in-the-know-’cause-we-have-a-five-year-old crowd like to them) let me give you some quick background. The Imagination Movers are a kid-focused rock band that began when a group of four friends in New Orleans discovered they shared a similar distain for music groups oriented for children. (With this I agree with them. Barney, Teletubbies and especially The Wiggles are downright creepy.)
They achieved significant regional success, selling over 100,000 copies of their independently produced CDs. In 2006, they inked a deal with Disney and for the past three years have been one of the top-rated shows on the Disney Channel.
Aside from being a pretty darn good writers and performers, the messages they convey in their music and on their show is spot on for their audience of future knowledge workers.
Each show centers around a different customer (yes, they call them customers not clients) coming into their Idea Warehouse with a problem that needs solving. The four Movers than ask some diagnostic questions (notice they do not jump to a solution!) until they decide that they do, in fact, have an Idea Emergency (I love this term). This phrase always trips an alarm and begins the song called Brainstorming which is sung in every show.
Because there are “no bad ideas when you’re brainstorming,” the Movers always end up solving the problem for their customer. Now the exchange of money is never talked about, but a few of the shows have focused around the guys solving some of their own problems, including one episode in which they record a TV commercial to attract more customers. In another episode, Bad Hair Day (one of my son’s, OK, one of my favorites), they need to help Mover Scott get his hair under control so they can take a picture for the newspaper.
In the first season, there was a neighbor called Knit-Knots who always wore beige, played only one note on his tuba (b-flat because, “the b stood for boring and the flat made it extra boring"), and did nothing in his office but “staple, stamp and stack” papers. While I rather enjoyed this slam at the monotony of the office service worker, it was clear that after season one, the gag had played itself out and Knit-Knots is not in season two or three.
Knit-Knots’ niece, Nina, however, has continued on the show in part to bring some female presence, but mostly because the actress that plays Nina, Wendy Calio is quite a talent herself. The live concert featured her in a cover of The Black-Eyed Peas’ I’ve Got a Feeling. Dare I say, she has a much better voice than Fergie.
I strongly recommend the Imagination Movers to any of you with children or grandchildren. Heck, maybe it should be required viewing for all current knowledge workers.
Why hasn’t one Top 100 accounting or law firm adopted Value Pricing and replaced timesheets?
After all, Crispin and Porter, an advertising agency with over 1,000 employees, does not do timesheets and Value Prices all its work.
Further, Coca-Cola and Procter & Gamble do not look at timesheets or billable hours in compensating their thousands of advertising agencies.
This is one of the topics we discussed at our recent VeraSage Conference in Napa, California.
Kurt Siemers, CEO of Kennedy and Coe, was in attendance and gave us his thoughts on this topic as well.
At a major meeting of large firms that Tom Hood facilitated, changing the reigning business model was number 4 on the list of priorities, which is encouraging.
To be fair, Kurt’s firm is in the Top 100 and has made significant progress in the area of implementing Value Pricing.
Tom Hood conducted interviews with Kurt Siemers, and myself after the conference.
What About the Big 4?
Brent Uken is a principal at Ernst & Young, a friend of VeraSage, and a profound and deep thinker.
Unfortunately, Brent couldn’t attend the meeting, but sent us his thoughts on why the Big 4 are slow to adopt—and by adopt, we mean change their business models from “We sell time” to “We sell intellectual capital.”
The following analysis from Brent, we think, is absolutely profound and is illustrative of what we in the professions are up against in our Quest to change the dying business model of professional firms.
Ron,
On the “slow to adopt” topic, let me offer my perspective and opinions.
What follows are candid thoughts that represent broad themes. No doubt that in an organization of 100,000+ you can find exceptions to what follows, but I believe based on my tenure/exposure within the firm, that these are in large part accurate.
If it’s slow to adopt abolishing timesheets—I think that’s a non-starter. It will take firms/organizations outside of the Big 4 to effect this change, and they will migrate to it eventually—but only when forced to.
There are several reasons why, but I believe the most compelling are that:
there are decades of culture around the use of timesheets (it’s embedded in the stories we tell);
timesheets are literally at the center of all financial reporting in the firm;
there is too much investment in timesheets and related financial systems for senior management to move in a different direction.
Specifically on the last point, as liberating and competitively advantageous as it would be to do so, our senior leaders know no other way, and it would be too threatening for them to discard what many have built their careers around.
Case in point: we still measure revenue per hour to the dollar on a weekly basis, produce literally thousands of pages of metrics a month that are based on the “chargeable hour” as the denominator in the equation, etc.
Case in point #2: Hours x rates x realization is how we measure revenue...revenue, arguably the most important measure of performance in the firm.
If it’s slow to adopt value pricing—I am much more optimistic. However, it is amazing to me that we continue with old/sub-optimal behaviors even in the face of concrete evidence that contradicts them.
As you and I have discussed, I know that it is human nature to do so—to remain on the shores of the familiar, as the forces that draw us to the familiar are incredibly strong. Nothing new to you here.
I think in the Big 4, however, the culture around timesheets and value pricing are linked (and if we can’t migrate away from timesheets/charged hours, by extension it’s going to be difficult to migrate to value pricing).
We’ve literally been trained (indoctrinated) that we sell our time, that we bill by the hour, and that clients want/expect us to bill by the hour and will not tolerate any other arrangement.
What perpetuates this is that indeed some clients, perhaps due to habit—perhaps because some are astute (they capture more of the value created by our services if they pay by the hour)—would prefer hourly billing (so there is just enough “evidence” in the market that supports our professionals’ views that it is the most appropriate billing arrangement for our services).
I don’t believe that we really understand the value equation, or maxims like “strategy dictates spend.”
I think we’ve lost our relevance, and that the supply-demand curve for our services has shifted against us over the past decade.
Not so long ago, there was more than enough work to be had, and not enough capacity in the industry (remember it wasn’t too long ago that Andersen was imploding, SOX was being introduced, etc.—heck, we were even firing clients!!).
That resulted in strong financial results, but it provided zero incentive to think differently. In sum, we are not identifying and understanding our clients’ strategic objectives. Obviously, if we don’t even know what they are, it’s impossible to align with them, support them—or help our clients achieve them.
We haven’t cracked the code on structure, either. There’s a thought provoking book entitled ReOrganize for Resilience that powerfully drives this point home.
We have been too internally focused for too long, and our structure doesn’t allow us to shift our focus to what is most important—the problems, initiatives and strategic objectives of our customers.
Our structure and performance management metrics are barriers we need to reduce/eliminate.
We have trouble articulating our own strategy. We’ve allowed benchmarking to peers and operating efficiency to be our proxy for strategy for so long that I can’t say that there’s much that’s truly unique about any of the Big 4.
And what’s implemented by one is quickly copied or adopted by another.
I do believe that we have the potential to truly differentiate, but we’re not seizing it. We haven’t found our competitive advantage or created a “blue ocean” (reference to Blue Ocean Strategy).
In my mind, the Big 4 is the epitome of competitive convergence (reference to Michael Porter’s HBR article, “What is Strategy?").
On a related note, to draw on Theodore Levitt’s work ("Marketing Myopia"), we don’t know what business we’re in, or what our customers truly value.
We’re over managed and under-led. We could benefit from revising the ”Why?" question, as we’ve been differentially focused on the “What?” and “How?”
It would be refreshing to have something that is truly bigger than each of us to rally around, and to have a leader(s) articulate a compelling vision and rallying cry.
It is easy to get lost in the day-to-day activities that masquerade as importance. The advice Drucker provides is truly timeless, and unfortunately we aren’t heeding it.
These are some of the major forces at play that are top of mind currently. I’m still trying to flesh this out, however...and I need to, as I create/align the change management strategy required to move us forward.
Contrary to the tone I may have set above, all is not lost.
Instead of the foregoing truly depressing me, I am extremely hopeful/optimistic. Because if we (EY, TAS, CT, Valuation—all the groups I am affiliated with) can figure this out, we can make the quantum leap over our competitors (Big 4 and others).
The resources and talent are there, and we do have a strong base on which to build (we’re a large firm with strong operating results and strong client base).
I personally feel that it is my responsibility to make this happen. As campy as it sounds, I truly feel that I’m on a crusade to effect the change we need.
I have 15 years left with the firm until I am forced to retire, and the clock is ticking for me. I want my legacy to be that I was the one at the center of this movement.
I hope this helps further the dialogue this weekend. Have a most excellent session!
Regards,
Brent
I’ve talked to a lot of Big 4 folks, and outside of the marketing and talent areas, it’s nearly impossible to find someone who gets it as much as Brent does.
Samuel Adams was right:
It does not take a majority to prevail, but rather an irate, tireless minority keen on setting brushfires of freedom in the minds of men.
Allow me to close by quoting Peter Drucker on two points (from a masterful book, Technology, Management, and Society). The first is why professions are so slow to change:
Indeed, in the business enterprise we have the first institution which is designed to produce change. All human institutions since the dawn of prehistory or earlier had always been designed to prevent change—all of them: family, government, church, army.
Change has always been a catastrophic threat to human security. But in the business enterprise we have an institution that is designed to create change. It means that every business, to survive, must strive to innovate.
The professions are not exactly incubators of innovation. I addressed this topic in my VeraSage DET in Napa (note: We will be posting in the future all of the VeraSage DET talks given in Napa).
The second point is illustrated by the pithy line from physicist Max Planck:
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.
This statement has often been interpreted as “science progresses funeral by funeral.”
This seems a rather pessimistic view of mankind’s progress, as if we had to line up our elders and shoot them in order to advance. Yet, sometimes it seems so.
Again, Peter Drucker said it best:
The young are always in the right, because time is on their side. And that means we have to change.
Tom Hood conducted an interview with Michael Hsu after the VeraSage Conference, a young CPA who embraces our radical business model.
No doubt that young knowledge workers are going to be the main driver of change in the professions, since they are not overly invested in a business model that is already dying.
I received a wonderful email last week that reaffirms my faith that VeraSage is making an enormous difference in the professional sectors, around the world.
I’ve long believed that if we are going to get firms to adopt Firm of the Future practices, we must get in front of Young Professionals, the leaders of tomorrow.
One such leader is Art, from New Zealand, who sent me the following email, providing an enormous HSD—High Satisfaction Day.
Dear Ron
You may be surprised to receive this email but I felt compelled to write to you and pass on my sincere appreciation as I finished your book, Mind Over Matter, in one evening and it profoundly changed the way I view my future and see the world. I believe your book had a profound effect on me as George Gilder’s Wealth and Poverty had on you back in 1981.
The ironic thing is that I am also an accountant and am studying towards my final CPA exam in October. I stumbled across your book at the university’s library while I was wondering around, browsing Peter Drucker’s books
To top it up, Peter Drucker is also your favourite Management writer. No one here at my workplace even heard of Drucker while I have been reading his books since my university years. And as far as Drucker’s principle goes, the one that I have been living with on a daily basis is, “The best way to predict the future is to create it”.
Ron—I wrote a long email but my key message is to express my gratitude for your ideas and example. Thank you Ron and I wish you all the best.
Best Wishes,
Art
Art was then kind enough to write the second review of Mind Over Matter on Amazon.com, which reads:
I stumbled across a copy of Mind over Matter while studying for my CPA examination in the library. I borrowed it and finished it in one evening. I am a young professional who has been thinking about what he wants to do with his career and hence his future. This book, luckily, does not tell me “what” my future should be, but instead it made me think about the “why” of my future direction in life.
A young professional, particularly those who are serious about their careers and self-development, should read this book for many reasons:
This book will challenge your current worldview about professional knowledge industry and the role your “intellectual capital” can enhance your capability as a future leader.
This book draws from the world’s greatest thinkers and economists, combining with the author’s proposition, to provide a rich discussion about what it takes to be a first-rate knowledge worker in the 21st century.
The author’s own life story will serve as an inspiration for many young professionals to “fly higher” and be brave enough to live their dreams and not settling for anything less.
I am so grateful to have found this little gem and I hope you will feel the same after reading it. The most amazing about being human is our mind, and this book tells you why our mind needs to be trained to achieve its potentials.
Thanks Art, I look forward to following your career path. I know you will make a dent in the world.
David Connell is a consultant to accounting firms in Australia. I debated him back in 2000 while I was touring with Paul Dunn. He recently wrote about the timesheet debate in his newsletter, with not very pleasant comments about Yours Truly (though he never named me, but you can judge for yourself who he was referring to).
Well, as you know, VeraSage loves a good debate, since we take our Quest of burying the billable hour and timesheet very seriously. In that spirit, I wrote the following letter to David today.
We will see if he responds. In the meantime, I’d love all our Fellows to weigh in on this debate, and make points I inevitably missed.
Buckle up, folks, this is a high speed ride, not for the faint of heart.
January 17, 2008
Hello David,
I’m sure you remember me, we crossed swords many years ago, regarding firms trashing timesheets, after a series of presentations I gave in Australia on Value Pricing.
It’s sure nice to see your Nov/Dec 2007 newsletter, “Future Directions and Practice Solutions,” where you admit that “value pricing is the direction that many if not most firms will take in the years ahead.”
Since I’m the person who put Value Pricing, Fixed Price Agreements, Change Orders, and Trashing Timesheets on the map around the world in what we at VeraSage Institute call Professional Knowledge Firms (PKFs), that’s a nice tribute to my work. Thank you. I’m happy to see the consultants to the profession down under, such as Andrew Geddes, Dave Smith, Rob Nixon, among others, finally join the parade, even if they are trying to get in front of it.
However, I notice that your thinking hasn’t evolved since our debate years ago, nor have your colleagues mentioned above. Ours has. It’s obvious you haven’t kept current with our work, the books I’ve written since, or all of the firms that have trashed timesheets since then—quite successfully I must say.
Just so you’re clear what I’m responding to, I’m going to quote you at length:
“Just be sure that you have the basics right first and by this I do mean making sure that your timesheet system in particular is properly used with ALL staff and partners having a clear understanding why. Readers will be very aware of my views in regard to maintaining a proper costing/timesheet system. Whilst ‘throwing timesheet systems out’ sounds like a marvelous idea it often means throwing the baby out with the bathwater. Don’t fall for the over simplistic advice to get rid of timesheets by one or two (very much in the minority) so-called Yank experts/authors. By all means let me have your views on this important subject—to date I have received many, many responses—all positively in support of this view.”
I understand the positive responses you’ve received; after all, the tailless dog often praises taillessness. But you are conveniently ignoring a plethora of contradictory evidence, which can’t be dismissed by labeling my argument “simplistic,” or me a “so-called expert,” or even a “Yank.”
You see, David, there are over 500+ firms around the world that have trashed timesheets, across all PKF sectors—advertising agencies, consulting firms, IT firms, accounting firms, and law firms. These are black swans to you, because you think all swans are white. Your theories cannot explain these black swans. Many of these firms are the most profitable firms in the world. (For an understanding of what I mean by the metaphor of black swans, see Nassim Nicholas Taleb’s book, The Black Swan—that is, if you’re still reading).
For someone who believes Value Pricing is the wave of the future, I’m amazed that your thinking hasn’t evolved beyond the timesheet. It’s obvious that you haven’t innovated a new idea for running a firm since the Soviets launched Sputnik. Do you not have any intellectual curiosity at all about how these firms have achieved what even you yourself call a “marvelous idea?”
Let me attempt to educate you. I see from page 1 of your newsletter you are a fan of Toyota. So am I. Are you aware that Toyota does not have a standard cost accounting system? If you’re not aware, I suggest you read Profit Beyond Measure, by H. Thomas Johnson, an accounting professor who studied Toyota in depth, as well as launched the Activity Based Costing movement with his earlier book, Relevance Lost. You see, if you utilize price-led costing (what Toyota calls Target Costing, part of its famous Toyota Production System) you don’t need to have standard, average cost, cost accounting systems.
Timesheets are no different. Timesheets cost by using average, not marginal or incremental, costing, an egregious error that leads to pricing mistakes. They are lagging indicators, yet firms need leading indicators, an enormous difference that you don’t seem to address at all, except that you cling to your benchmarked lagging indicators of realization, hours, etc. Not to mention that being a more accurate cost accountant does not make one a better pricer. Only understanding value and economic price theory does.
Now, the difference between you and me, David, is when I read, hear, or see something that contradicts my firmly held beliefs of the way the world works, I will thoroughly investigate it. If empirical evidence proves there’s a better way, I will admit my error and change my mind. What do you do?
Apparently, you dismiss the evidence because it’s from a Yank, or because it’s just a minority of firms that do it. But that’s not how science, economics, or business management progresses. Wisdom and truth are not determined by seniority, nor majority vote.
Under your logic, the fact that only a few automobiles were made in the early years of the combustion engine was proof the buggy whip manufacturers had nothing to fear. The fact that vacuum tubes were at the apogee of their market penetration was proof the transistor was just a fad. But the efficacy of new technologies, theories, or management ideas are not determined by how many people are using them, but whether or not they work—it’s the availability and efficacy, not penetration, that counts. It’s not a show of hands, majority vote process.
Technically, it’s called diffusion theory. And with respect to new theories, it can take decades, generations, or even centuries, before a population accepts them.
For example, germ theory took nearly 100 years (some scholars say centuries) to diffuse within the medical profession, and that was the simple idea that doctors should wash their hands between examining patients. The fact that a majority of doctors did not believe this theory, or abide by it, did not make it wrong. Nor did it mean that by following its precepts, they would have been throwing the baby out with the bathwater. It does means their thinking and efficacy would have progressed the sooner they accepted the theory.
So, you may ask, what replaces timesheets—that stale and putrid bathwater you insist firms continue marinating in? Here’s the answer:
Price-led costing
Project management
Key Predictive (not performance) Indicators
After Action Reviews
Before Action Reviews
Fixed Price Agreements, Change Orders
Chief Value Officer and/or a Pricing Cartel
The advantage of these methods are they actually enhance the intellectual capital of a firm, something I don’t see mentioned at all in your work. If you are not familiar with these methods, you have some serious learning to do. You also have some serious thinking to do.
Today, and for the last 50 years, accountants live and operate in a knowledge (or intellectual capital) economy, not an industrial or even a service economy. Do you know the difference?
Knowledge workers own the means of production, unlike in the Industrial Era where, say, Henry Ford owned the means of production and workers had to work to the rhythms and cadences of an assembly line. According to the World Bank, and other economists who study human capital, 75% of a country’s wealth resides in the head’s of its people. This is true at a macro level, and at the micro level of an accounting firm. My latest book, Mind Over Matter, explores this topic in tremendous detail.
Another difference between a knowledge worker and an industrial or service worker is this: We don’t know how to measure their “productivity.” All the metrics you cite—realization, utilization, hours, etc—are inadequate to measure the effectiveness of an accountant because these only measure inputs and activities, not results and value.
You cling to these metrics because you know nothing else and they can be easily measured. But weighing ourselves more frequently, or accurately, doesn’t change our weight. The fact is, we don’t know how to measure the efficiency of a knowledge worker because we can’t see what’s going on inside their heads. We have to discern it from the quality of their work. It requires judgment, not measurement.
Someone can look great on a timesheet, but have a lousy customer service attitude, perform work so sub-standard it has to be redone, or be disruptive to colleagues. So what good is measuring hours logged on a timesheet? Do you think you can measure the value of a Picasso, the deliciousness of a meal prepared by a five-star chef, the splendor of a building designed by an architect, or the acting ability of an actress, by looking at the hours they work? As they say, it’s easier to count the bottles than describe the wine. You remain mired in counting and costing the bottles, while we are interested in the quality, taste and subjective value of the wine.
Knowledge workers aren’t inspired to track every six minutes of their day. No one entered this profession with the objective of logging the most hours. Not only is it the wrong theory of value, it’s also demeaning, demonstrating a lack of trust, treating them like children. The Marginalist Revolution of 1871 proved hours/costs are not determinants of value, refuting Karl Marx’s labor theory of value, which you also seem to cling to for dear life. We’ve proven it in hundreds of firms that don’t use timesheets. Some of these firms are in your country. Some are in New Zealand, some in the UK, some in Canada. Most are Yanks.
I was taught in 1984 by Peat Marwick Mitchell that I sold time. Yet no customer buys time, hence no accountant sells it. How can we possibly sell something the customer doesn’t buy? This nonsense on stilts has been perpetuated by two generations of firm leaders and consultants to the profession. You are advocating a status quo that is already dying.
You wonder why there is a talent crisis in the profession? Well, stars don’t work for idiots. Knowledge workers now understand—certainly better than you and I did when we entered the profession—that the value they create is not predicated on the time they spend. It’s based on the quality of their work, their passion, dedication, professionalism, customer service ethic, innovation, creativity, mentoring, communication, interpersonal, listening, coaching and learning skills. None of these characteristics can be measured by your sacred timesheets. Timesheets do not capture the most important traits of a successful knowledge worker.
[I also suggest you read The Future of Management, by Gary Hamel (you’ll be happy to know he’s not a Yank). Read anything by Peter Drucker, especially his work on knowledge workers, emphasizing the difference between efficiency and effectiveness. Also, check out Stephen Covey’s The 8th Habit].
The talent crisis we face is the fault of current firm leadership, and consultants such as yourself, who keep the profession mired in the mentality that it sells time. We at VeraSage do not want one more single generation of knowledge workers to be taught these economically fallacious theories.
Therefore, we operate a think tank, not a consulting firm. We are dedicated to improving the posterity of the professions by removing the billable hour and the timesheet from all PKFs. We are disseminating our message far and wide, with emphasis on young professionals. We teach them they don’t have to be galley slaves on the SS Billable Hour. We teach them their value lies in their creativity and ideas, not accounting for every six minutes of their day like prisoners.
Our 15 worldwide VeraSage Fellows advance our cause in the arena of ideas, posit and test new theories, constantly read, think, and revise our theories. Most of them operate accounting, law, or consulting firms where they Value Price and don’t have timesheets. We have already transcended you and your old, anarchistic theories, moving on to greener pastures. Your ideas are past their sell date. You’ve done enough damage to our profession. It irritates the hell out of me that you continue to teach this nonsense to the younger generations. But that’s alright, the world needs its museums. The sunlight of truth is the best disinfectant.
In any event, we will free the professions from the tyranny of time. It’s merely a question of how long it will take to diffuse these theories. Comparing our progress to historical precedents, I’m encouraged.
You can bury your head in the sand, you can call us names, label us simplistic, ad nauseam. The one thing you can’t do is refute facts. Facts are stubborn things. And while you are entitled to your opinions you are not entitled to your facts.
For more information, you can read our Community Blog and Trailblazers Section of our Web site, where we have case studies from firms that are doing what you say can’t—or shouldn’t—be done from around the world.
It’s nearly impossible to debate with someone who claims that what is being done cannot be done. It’s not how civilization advances, and it certainly is not how the professions advance. Maybe Max Planck was right: Science advances funeral by funeral. So be it. The younger generations will be the ones who transform this profession, and they will be around a lot longer than you and existing firm leaders. Our job is not to leave them outdated legacy systems and negative intellectual capital, but rather useful theories and concepts they can build on to progress.
In the meantime, rest assured that the validity of a new theory is not determined by how many people are doing it. A theory stands or falls on its own strength. And the evidence is overwhelming that our theories work. Everyday, more and more enlightened firms adopt them. Some you may even know.
Of course, if anyone falsifies our theories, we will revise them, as this is how we progress. But you have failed to do that since your theories have already been falsified. We are always open to new and better ways to implement our theories. But so far you have contributed nothing new to the debate in the seven years since I became aware of you.
If you do respond to this letter, please make specific refutations of the evidence presented, not merely label it “simplistic.” I’ve provided incredibly deep specificity refuting your arguments, and the only way this debate will advance is if you do the same. Though I’m doubtful you will be able to refute anything contained herein since you clearly are not aware of most of the evidence.
A leading indicator will be if you post this letter on your Web site. I am posting it on ours. Feel free to respond to it there and let the debate continue. But be warned: You will be debating with people who live and breath this topic as much as I do, who do it every single day of their lives, who educate others about it, all of which means they understand it a level of depth you cannot even fathom. I wouldn’t show up to a gunfight with a butter knife.
If I were you, I’d be very nervous about my precarious worldview that has already been shattered by empirical reality. It’s not a matter of me being right and you being wrong, David. It’s an empirical test of what works. I have the courage to face the evidence, to be wrong, and subject my theories and ideas to the test of the marketplace. Do you?
I think you do.
After all, by your own tacit admission, this Yank was right about the future of Value Pricing. What makes you think he’s wrong about the inevitable death of timesheets?
VeraSage Fellow, Tim McKey (from Baton Rouge, LA) says, “I’d rather sleep under a bridge than go back to timesheets.” If that doesn’t convey how much of an improvement value pricing is, I don’t know what will. Make no mistake, though, Tim needn’t sleep under any bridge! His income isn’t exactly worse with a Value Pricing approach.
On Monday, Oct 22, in Las Vegas, meet and hear from Tim McKey and many others who have taken the path toward building a Firm of the Future (including me). Others present will include: Dan Morris (http://www.cpadudes.com) and Daryl Golemb from California firms; Peter Byers, Yan Zhu and Brendon Harrex (speaking) from New Zealand; and Chris Marston (also speaking) from Boston. In addition to Chris and Brendon’s presentations, you’ll have a chance to ask the rest of us, any questions you might have.
If you really are curious about “how” to break free of hourly billing, you need to be in Las Vegas.
At least 8 VeraSage Fellows/Founders (from Accounting & Law) and several employees of their Firms of the Future will be there. The night of the 21st and 22nd, many of us will be hanging out at a Rio lounge to talk with attendees.
It’s a rare opportunity to have a whole bunch of “converts” in one place. Do come! And pick our brains.
And spend the day at the Rio with VeraSage on Monday. Seriously, it’s only $129 (just to cover room & A/V costs). Rio room nights Sun and Mon are only about $100.
The number one issue facing the accounting profession, according the all the Management of Accounting Practice (MAP) Surveys conducted for years, is retaining and attracting talent. All sorts of faddish ideas are tossed around by consultants to the profession to help ameliorate this issue, such as: understanding Gen X, Y, Z and how they are different from the Baby Boomers and prior generations; offering more attractive benefits; higher salaries; more educational opportunities; and of course the biggest fad of them all, work/life balance.
But I’ve come to believe that these are just all effects, not the root cause of the problem. I truly believe the root cause is that firms don’t understand that their people are knowledge workers. Oh, they might use the term human capital investors, or even knowledge workers, but do they really understand what that word means? It means this:
Knowledge workers, unlike manual or service workers, own the firm’s means of production in their heads.
In the old days, if I worked for Ford, Henry Ford owned the means of production, and I had to show up and work to the rhythm and cadence of his assembly line. Today, if I work for KPMG, I own the means of production in my head, and their offices are simply there to help me do my job. I don’t work to the cadence of an assembly line, but rather through a process of iteration and reiteration—a process of the mind.
I may even know more than my superior about the particular job I’m doing. Otherwise, why would they even need knowledge workers with high levels of expertise if their superiors could teach anyone everything? Further, I’m only going to invest my human capital—which is approximately 80% of the world’s wealth according to the World Bank—in a firm that pays a decent return on investment as well as attractive psychological rewards—room for growth, challenging work, great customers, life long learning.
Also, a knowledge workers’ value is not measured by the time they spend, but rather the value they create through ideas, innovation and creativity. Ideas are always and everywhere more valuable than their mere execution. I rather be the guy who designed the pyramids than one of the many who built them.
There’s much more to this knowledge worker paradigm, which is why I wrote my forthcoming book, Mind Over Matter. Peter Drucker coined this concept in 1959, it’s not exactly a new idea. But if you listen and watch how firms treat their talent, you’d never know this concept exists, especially in the accounting and legal professions.
Mark Bailey, one of our Trailblazer firms from Reno, Nevada, sent me an email the other day which illustrates how endemic the idea that people are simply service workers is, especially in the big firms:
Dear Ron,
Last week I was invited to participate in a roundtable discussion of problems facing Nevada accounting firms. The event was held in Las Vegas and sponsored by the Nevada business Journal. The participants included the managing partners of several larger Nevada firms, and of course members of the “Big 4"and other national firms. Given the first opportunity to speak, I expressed my opinion that attracting and retaining professional staff has become a crisis in recent years. This is a problem, we as a profession, have brought on by remaining steadfast to management principles that are not responsive to the needs of today’s young professionals. It has been compounded by the increased workload brought on as a result of Sarbanes-Oxley, both directly and indirectly. (In Nevada we’ve also adopted the 150 hour requirement for candidates to sit for the exam, which has served to further limit the work force).
In our firm we’ve attacked this problem aggressively, by attempting to create a work environment with a work/personal life balance. Everyone at the round table seemed to agree that this was the key, and several shared what they had done. One Big 4 managing partner said they’d resolved the problem by going to flex time. At that firm they can set their own hours, but they still have to meet the standard of 55 hours per week. I am hard pressed to see how that “improves” lifestyle, although I guess they are free to use those hours between 1 and 4 a.m to meet the quota. He said their retention was much better as well. Just as many people were leaving, but the feeling was that now more were coming back!
Great logic. “We may not be doing things right, but some other companies are doing even worse, so our staff will quit and come back.” Another managing partner said the way to attract and retain staff was to “pay more.” He apparently doesn’t read the AICPA surveys related to staff motivation and satisfaction, which allude to such things as being respected, trusted and having interesting and challenging work to do, over compensation. Another felt that it’s a generational problem, and “young people today just don’t have the same commitment and ethic us old guys did.” Even if that was the case, which it isn’t, are you going to address it or just tear your hair and throw your hands in the air? And still another seemed to believe it was just a local problem and the Nevada Society needed to advertise for employees in other states. Nobody gets it.
My advice. Get rid of the timesheet. Value Price. Reduce (or eliminate) overtime. By doing so you have the basis to create a healthy, trusting work environment that is reasonably balanced with the personal needs we all have. I did get some interest from two larger regional firms. Nothing from the “Titans” of our industry however.
In keeping with our philosophy of trusting our associates and team members, our next project is to implement a system to fill the needs left by “eliminating the annual performance evaluation.”
What was absolutely apparent to me, was that there is recognition that the billable hour culture is fatally flawed, and many practitioners are ready for change. I believe that given a mechanical system that fills the void, they will embrace Value Pricing. “If we build it, they will come.” And I think we’re very close in my firm to having it built.
Regards,
Mark Bailey
Mark understands that we at VeraSage have issues with work/life balance, and think it’s just a symptom. But he’s absolutely right when it comes to Value Pricing, dumping the timesheet, and eliminating the annual performance evaluation, another cancer in all firms that needs to be cut out. His firm is making incredible progress on all these fronts, and more.
But I don’t share Mark’s optimism that “if we build it, the big firms will come.” We have built it, and they remain impervious to outside ideas and influence. And that’s a huge problem, because most young professionals pass through the Big 4, and certainly the Top 100 firms, at some point in their career. They are being taught the same nonsense I was taught by KPMG in 1984: you sell time, and here’s a timesheet.
When is this going to stop? The AICPA, state societies, and other professional organizations are not to blame. Certainly, they perpetuate some of this nonsense, but it is up to the firms to innovate and try new things. But the large firms are hermetically sealed to creativity, new ways of doing things, or even an idea that dates back to 1959.
In a follow-up email, Mark made this cogent observation:
My experience is that our knowledge workers will find the equilibrium of work/life balance without sacrificing either if given the responsibility and trust to do so, and not micro managed as you point out. I absolutely agree. Micromanagement leads directly to an imbalance. Interestingly our biggest problem with eliminating timesheet was knowing when a particular associate was working more than we feel is healthy in the long term. It forces better communication since we don’t have that timesheet crutch.
Because “micro-management” is defined differently by those who are most guilty of it—because of course they don’t do it—I have a tendency to focus on the “symptoms,” e.g. work/life balance (the effect) rather than the cause, micromanagement. Pointing out the “symptoms” makes it harder for them to deny they are guilty. Regardless, you are correct. I try to reinforce with our knowledge workers that each of them is a “business.” Each day when they come in they “rent” their knowledge and experience to us, and they are responsible for providing maintaining and improving what we rent from them. It’s their responsibility to provide that product. Each evening when they leave, they take it with them. They are compensated what it’s worth, and if they make it more or less valuable, that’s entirely up to them. We of course support them in their efforts. I know this is simplistic, but I think it has communicated some very important philosophy. I’d welcome your criticism of this analogy.
Until we reach a critical mass of firms throughout the world that share Mark’s philosophy, young professionals won’t have any choice to pursue a career in a firm that treats them like real knowledge workers. I dream about putting leaders like Mark Bailey, Chris Marston, Brendon Harrex, among others from our Trailblazers, in a room with each CEO of the Top 100 and let them all do a pitch to a group of 100 young professionals about why they should work at their firm. As Lenin said [regarding emigration], “voting with your feet” is a tell-tale sign of your real values.
Perhaps then these leaders might wake up to an alternate reality—what we at VeraSage now refer to as a Black Swan—that to this day they either deny exists, or think it’s mainly on the fringe and hence too small to be important. Much like the Big 3 automakers thought about the Japanese in the 1970s, and they are still playing catch-up.
Yet VeraSage is a Black Swan, and so are all the Trailblazers out there. We are creating the future, and it is very disruptive. Eventually the big firms will have to acknowledge it, and then play catch-up.
The Future is Already Here...It’s Just Unequally Distributed
For a profession to be truly innovative, it must not only do new things, it must stop doing old things. It is not possible to create tomorrow without first getting rid of yesterday.
You know there has to be a better way. And there is.
Attend THE event young professionals have been crying out for—given directly by the leaders of two REAL, practicing, thriving Firms of the Future—one law firm and one accounting firm.
Brendon Harrex, 33 year-old founder of the Harrex Group in Gore, New Zealand, and Chris Marston, 31 year-old founder of Exemplar Law Partners in Boston, MA, are revolutionizing the way professional knowledge firms are led.
Brendon and Chris are two of the professions’ most visionary leaders because they understand they attract knowledge workers, and therefore treat their employees radically different than the average firm: No billable hour quotas, no timesheets required, investment in education quadruple the average firm, autonomy to set your own schedule, and time set aside to pursue to your passions. Each has a waiting list of people who want to join their organizations!
Brendon and Chris understand that professional knowledge workers sell intellectual capital, not time. They don’t treat their people like union employees or children who have to account for every six minutes of their day. You are not galley slaves on the SS Billable Hour, but human capital investors who deserve to be treated with respect, autonomy, and dignity. They also know the partnership model is broken and they each have innovated new ways of running the businesses of their firms.
In addition to Brendon and Chris, many of the VeraSage Founders and Senior Fellows (from 30 to 65 years of age...all doing value pricing and ALL operating without timesheets) will be on hand to share their experiences and answer your questions. Come hear, from the horses’ mouths, what the future of the accounting and legal professions looks like.
If you’re discouraged in your “traditional” firm or wondering why you chose your profession in the first place, this is the knowledge and inspiration you need in order to reinvigorate your career. And meet the many others who share your frustrations. This proves to be a remarkable networking opportunity to create long-lasting friendships and business contacts.
This high-energy event promises to be extraordinary because it’s the first—and maybe ONLY—time VeraSage will simultaneously feature these young leaders of true Firms of the Future. Several other Senior Fellows of VeraSage comprise a panel to field audience questions about converting a traditional firm or starting their own Firm of the Future.
The future of the profession lies in firms led by innovative individuals. If you want a sneak preview of the improved and exciting future your profession, don’t miss VeraSage Institute’s Inaugural Young Professional Program.
VeraSage will be having its first ever (private) in-person meeting of all founders and fellows in Las Vegas over a weekend in October. But we’ve just decided to add a public session if we can generate enough interest.
Since this is a once-in-blue-moon opportunity to bring together innovators from all over the world, we want to feature Brendon and Chris to other young professionals. You in?
“Our answer is the world’s hope; it is to rely on youth. The cruelties and obstacles of this swiftly changing planet will not yield to obsolete dogmas and outworn slogans. It cannot be moved by those who cling to a present which is already dying, who prefer the illusion of security to the excitement of danger.” —Robert F. Kennedy, “Day of Affirmation” address, June 6, 1966, University of Capetown, South Africa
I first heard of Brendon Harrex when he e-mailed me on July 13, 2004. While many firm leaders pay lip service to the idea of innovation, when it comes down to actually implementing new systems and processes the status quo proves to be firmly entrenched.
Brendon had read my ACCA booklet, Trashing the Timesheet, a radical idea, to say the least. Most accountants start by reading the first booklet in the series, Burying the Billable Hour, but Brendon made the connection instantly. Here is what he asked me in that first communication:
Your thoughts further confirm my thinking that as a profession we cannot continue to create value and attract young people to accounting as a career as long as we sell time and not value. I am one partner in a practice of 10 partners and I have the opportunity to convince them of the merits of your thinking in an upcoming strategic retreat in early August. I think I have created a compelling argument in support of “value” thinking; however, I suspect I will get lots of questions relating to how this works in practice.
Do you have any contacts in New Zealand who are further through the conversion process than our firm or any material that may be useful in strengthening my case? I want to see us adopt value pricing as soon as possible otherwise we will be overtaken by technology and clients who demand more from us than our systems can deliver.
I would greatly appreciate any assistance you could provide. Keep up the fantastic message.
These questions demonstrate Brendon’s passion for continuously learning, inquisitiveness, and challenging the conventional wisdom endemic in most firms, which states: “Because that’s the way we’ve always done it.”
After providing Brendon with more resources, including an extensive reading list, and putting him in touch with my colleague Peter Byers (who had already implemented these ideas into his practice), Brendon was able to communicate the message to his partners and build enough of a consensus to allow me to visit his firm in February 2005 to conduct a two-day workshop on Value Pricing and Trashing Timesheets—no small feat in a partnership full of skeptics.
Shortly after this meeting, Brendon was appointed Chief Value Officer—the first in the world that I am aware of. This is an incredibly challenging position, the responsibilities of which you can read about in my article: “Who’s In Charge of Value at Your Firm?” Brendon’s performance in this function was outstanding and he was subsequently appointed Chairman of the firm on May 2, 2006.
On June 21, 2007, while I was in London presenting at the CIMA Conference, Brendon sent me the following email, updating me with his exciting news:
Hi Ron,
Well, who would have thought 12 months ago that Ward Wilson would be part of the consolidator trend that appears to be gaining more momentum in our profession as the average age of qualified accountants continues to rise. To paraphrase Tom Peters’ quote that you also used in Professionals Guide to Value Pricing, “I struggle to see how mating two dinosaurs would create a gazelle!”
This mating has provided me with the incredible opportunity to create my own gazelle known as the Harrex Group. I have attached for your information a copy of our launching advert that ran full page in the local newspaper.
The Harrex Group truly is a firm of the future, offering customers accountancy-led ideas, advice, and project management. Of course, we operate without timesheet and this frees us to focus on the delivery of high value business solutions rather than assuming that all time has the same value (as long as it is productive of course!).
I have appointed a non-accountant CEO, Nicki Morsink, who is the former CEO of Ward Wilson. Unlike most accounting firms where the CEO is the person you blame when the committee (the committee = all owners as everyone must have their say) makes a bad decision, Nicki is a real CEO—she signs the cheques, drives the business and ensures we are all performing. This works well as I am focused on the customer interface/selling, pricing and coaching.
Ron, I believe that the future of our profession lies in smaller accounting businesses led by innovative individuals. I share Chris Marston’s concerns about the ability of large firms to implement value pricing—most have such a fear of reduced income that they cling very tightly to what they can measure (regardless of its relevance). I simply believe that many traditional accountants are incapable of operating without timesheet.
Upon formation of the Harrex Group, I was approached by the very best people who wanted to be part of a firm of the future and not a firm of the past! We currently have a waiting list of talented people wishing to join us and this is certainly not a common complaint of the profession in our part of the world.
I believe the smaller, innovative firms will attract all the talented staff and eventually dominate the accounting world, as their innovative services and ability to respond to the market will become increasingly in demand by business.
Thanks for your fantastic support and energy, Ron—you don’t know how marvelous it feels to be in a business that is focused on the right things!
Regards,
Brendon
Brendon understands the vision and leadership required to operate a firm of the future. It is not solely about creating a more profitable firm, but about creating a better quality of life, both for the team members of Harrex Group as well as the prosperity of our profession. Accountants are among the premier knowledge workers, not union employees. The value they create is not determined by how many hours they work, but rather the value of their ideas. Yet the metrics in most firms treat workers as if they worked in a factory. Knowledge workers do not work to the rhythm and cadence of an assembly line, but rather an iterative and reiterative process of the mind.
How many accounting firms do you know that maintain a waiting list of people dying to work for it? If this doesn’t prove the power of operating within a Value and no timesheet culture, than the leaders of this profession are blind, and the only way we will make progress is funeral by funeral.
The Harrex Group is a shot across the bow of the SS Billable Hour, along with its last-of-the-Luddites captains. Wake up firm leaders, the future is already here, it’s just unequally distributed. Once more and more firms, like the Harrex Group and Exemplar Law, begin to pilfer your human capital you’ll be forced to change your ossified ways or be destined for an existence of mediocrity.
Today’s knowledge workers own the means of production, which tilts the economic power in their favor when selecting a firm in which to invest their intellectual capital. Most firms haven’t even recognized this fundamental shift in how wealth is produced because they are trapped in an Industrial Era mindset. Harrex Group recognize the realities of a knowledge economy, and have adopted a better business model—one that will inevitably be replicated by other firms in the future—in order to attract the best and brightest into our profession. This cannot be accomplished by today’s firm leaders who cling to a present which is already dying, and who prefer the illusion of security and mediocrity to the excitement of dynamism and change. It must be achieved by truly visionary and courageous leaders.
Brendon embodies the essential characteristics of such a leader: Effective interpersonal skills; risk taking, innovation, and creativity; ability to change minds; continuous learning; pride, passion and commitment
None of these characteristics can be measured—they must be judged, discerned and experienced. It is a rare accountant that possesses all of them while still remaining humble and grounded in a deep abiding faith in the future.
I have had the great good fortune to spend time with this incredible individual, and he continues to teach me lessons and add immensely to my intellectual capital. It was a personal honor when he became part of the think tank I founded—VeraSage Institute—in order to help spread our message and ideals around the world for the betterment of our chosen profession.
Meeting Brendon reminded me of what Winston Churchill wrote in A Roving Commission, in 1930:
Don’t be content with things as they are…Don’t take no for an answer. Never submit to failure. You will make all kinds of mistakes, but as long as you are generous and true, and also fierce, you cannot hurt the world or even seriously distress her. She was made to be wooed and won by youth.
No doubt, I am biased with respect to Brendon’s leadership and vision. But I have absolutely no doubt that his contribution to our profession has just begun. This is the beginning of the end for the Last of Luddites, those firm leaders that don’t have the guts or the vision to imagine any other way to run a professional knowledge firm.
Brendon is leaving a legacy, not just for his firm, but for our profession. Brendon has already created quite a legacy, and I have no doubt the best is yet to come. His leadership, courage, and perseverance is an inspiration to thousands of professionals around the world, and yet he remains humble in exaltation. I am honored beyond words to have him as a colleague, and—more importantly—a friend.
Check out Brendon’s innovative advertisement (as a pdf for a better view) explaining the Harrex Group.
Allison Shields has an excellent post on her LegalEase blog called ”Why Do Lawyers Leave the Law?” She describes a departed lawyer’s frustrations as described in a article in New York Lawyer:
“I felt that something I’m really good at is turnaround time, and I did not feel there was any reward for that,” she says. “The reward was more work. I didn’t see how I could ever get to the point where I was so good at my job that I could manage it all. The point was the hours.”
This is exactly the scenario Ron Baker describes as human cattle and not human capital. How can someone feel good about his or her professional career when one’s day is more like a production line? Allison goes on to describe:
Under a billable hour system, this is exactly what happens: rather than being rewarded for being efficient (or, even better, effective) - which is what the client would most often prefer - many lawyers in a billable hour system are penalized for exactly the kind of work that clients want. Lawyers need to make their hours, so their alternatives are to either work slowly, inefficiently, and ineffectively, or to ‘pad’ their hours - unless they want to be passed over for advancement or compensation increases.
See her blog post for more excellent insights as well as a link to the original article. As an aside, several VeraSagers (Ron Baker, Paul Kennedy, Tim McKey and I) had the pleasure of meeting Allison in Kansas City in November. She’s a great thinker and adds tremendously to the professions of consulting and law.
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