Last Saturday evening I received this email from Ken Morrison of Provision Accounting Group in Richmond, British Columbia.
This is definitely an HSD.
Ron,
I am an “older” chartered accountant in Richmond British Columbia (forty years in the business). I have two younger associates (29 and 34) who are preparing to take over. A staff of six for a total of nine. We have been very successful over the last four years marketing (the old guy young guy combo is deadly).
But Nathan (29) found your site and challenged us on the value pricing concept, scrap timesheets etc., we have now instituted the fixed price agreement for all new clients and are going to transit existing clients over the next months. Much of what you advocate we were doing, culling poor clients etc but the fixed price agreement and value pricing is revolutionizing our business.
I personally am for the first time in forty plus years am free from needing to rationalize my pricing to an hourly rate and can price value. It is changing my life.
The one other change I have made is that since we are giving the client a fixed price and a cash back guarantee we are asking for quarterly payments on all accounts. For example, if the fixed price is $5,000 and the year end is December 31, we ask for $1,250 on June 30, $1,250 on September 30, $1,250 on December 31, and the final payment on March 31, which is our latest deadline for completion of the work.
You can imagine how this is reducing our work in progress and account receivable balances.
The old guy is ready to scrap timesheets now, the young guys are holding back.
Thanks for your leading the change.
Ken Morrison
Thanks Ken.
Congratulations and keep us posted on your progress. I can’t wait to publish your Trailblazer case study after you’ve eliminated timesheets.
Our Australian colleague John Chisholm wrote about The Australian Legal Affairs Section of August 20th being primarily devoted to the problems and hopeful demise of the billable hour.
All the articles are worth reading, but the one that caught my eye was devoted to Lavan Legal, the Perth firm that is on track to eliminate timesheets in approximately two years.
This is a 200+ lawyer firm. So much for the argument that only smaller firms can achieve this transition.
John also reports that next week’s Legal Affairs Section (it runs every Friday) will also have more articles dedicated to this topic.
Obviously we are nearing a tipping point Down Under.
Another article in Lawyers Weekly on the Perth firm Lavan Legal and its quest to rid itself of timesheets.
Lavan was mentioned in a prior post, which also linked to a local article on the firm.
Dean Hely, the deputy managing partner, said the firm established a pricing committee as of July 1 and is aiming to move away from time-based billing to showcase its innovation credentials.
He also noted:
You do get used to timesheets but the thought of not having timesheets is like the lawyer’s utopia.
Of course Utopia means “no place,” but there are firms out there without timesheets.
I’m not about to claim they are all utopia, but we do know it’s possible.
Another law firm is profiled in this article in The Lawyer:
CMS Cameron McKenna has launched a marketing campaign to promote its alternative billing structures, which include a ‘pay what you think its worth’ option, to clients.
This firm has also established a pricing team.
Since pricing is a separate function, we are big advocates of turning it over to people who are good at it.
Poor pricers should not be allowed to price.
Congratulations to these two firms. More cracks in the dyke of the obsolete billable hour.
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.
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.
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.
I have just returned from Sage North America’s Insights conference in Denver. The conference is, at the same time, completely exhausting and completely invigorating. I learn so much from Sage partners because they continue to test my thinking.
Without question, the best test of my thinking came during my pre-conference session on Sunday. One of the attendees (I cannot remember who, so if it is you, please claim the credit) shook me to the core. She said, “So if you believe we are professional knowledge firms, why should we be selling service level agreements?” I was dumbstruck.
My only response was, “You should not.” I have to admit, I have been wrong.
In one of the all-time great movies The Ten Commandments, Cedric Hardwicke as the Pharaoh Sethi says, “Let the name of Moses be stricken from every book and tablet. Stricken from every pylon and obelisk of Egypt. Let the name of Moses be unheard and unspoken, erased from the memory of man, for all time.”
The same must be done for service level agreements. So, let the phrase “service level agreement” be stricken from every Ron Baker book and article. Stricken from every blog post and comment on the VeraSage Website. Let the phrase of “service level agreement” be unheard and unspoken, erased from the memory of professionals, for all time.
In keeping with this pronouncement, above is my slide from my session on creating, service access level agreements at the conference. Access Level Agreement is, for now, a placeholder. Other ideas I mulled over where: customer level agreements (too direct), support level agreements (too limiting), and access contract (too legal).
It is time once again to tap into the collective intellectual capacity of the community. Please post your ideas and arguments for or against the correct phrase.
This session will be dedicated to the possibility that a professional organization can be run more effectively when it becomes a knowledge firm rather than a service firm. Creating such an organization is hard work and not for everyone. It requires us to think differently than we have in the past about what it is that we do.
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!
Recently he participated in an UnConference of FileMaker Pro developers and consultants. He has been kind enough to share the video of his presentation. I think you will agree that Kirk did a great job. Here is his introduction to the session:
At DevCon 2009 I participated in a business panel discussion as an advocate for hourly billing. Since then I researched value pricing and found it to be superior in several ways. Would you like happier clients? More profitable projects? Less administrative burden? I’ll explain why I have adopted this model for my company and what the advantages are. Also, I’ll address the different challenges implementing value billing for a sole proprietor vs. a company. I’ll show how I have adapted it to our company including an overview of the sales and proposal process. One thing I have learned and am anxious to discuss with the group, is whether you use value based billing or not, thinking about it will improve how you do business.
I am so opposed to billing by the time unit, that I refuse to pay the $0.50 for those two minute mechanical rides to nowhere near shopping centers.
In this video, you see how my kids completely enjoy themselves (effectiveness) even though the ride never moves at all (not efficient), plus I don’t pay anything!
As an added bonus they make their own sounds and it qualifies as creative play!
First, I received word that an online comment I made on a Harvard Business Review blog post would be printed in the magazine.
For those of you that can’t make it out, my 15 seconds of fame reads, “Business ain’t science.” I told the copy editor that I had more to offer than that and that I usually am grammatically correct, but they did not seem interested. “No, your thought really says quite a lot.” Uh-huh.
Next, my article on using project management to replace the timesheet finally made it into the Journal of Accountancy. Please comment there as I would love to get a big long string going.
Could it be that the Mets getting out of the gate strongly? I can only hope!
While I have heard the objection of revenue recognition to fixed price and service level agreements before, there has been a recent spate of them and my default value reply is to say, “Really, that’s all you got!”
The more detailed answer is to ask, “Are you a publically traded company? If not, there is really no problem.”
This is usually met with silence followed by some mumbling about a possible future creditor using WIP or receivables to secure a loan. The response is then to say, “What about using the signed agreement from your customers? Isn’t that better than time either billed and not collected or time not billed at all? Besides, I recommend you get paid upfront.”
Again, more silence followed by, “Yeah, but if they prepay me, I can’t recognize the income.” My reply, “So, you are complaining that you will have too much cash is the bank? Maybe you won’t need a loan in the first place.”
That usually ends the argument, as if there was one in the first place.
While some objections to pricing on purpose and service level agreements are better than others, this one takes the cake. It is just a non-starter.
Greg Kyte is the self-proclaimed “Champion of the Dissenters.”
Here is Greg’s second contribution in defense of the billable hour and timesheet.
Ron Baker, you were wrong once again. The night before last was one of the biggest nights of the year for my firm. You and the rest of the VeraSage flunkies could have had a piece of it too, but I guess you ditched the timesheet an hour too soon.
You see, we have an annual tradition during the heart of busy season. Everyone in our firm is expected to work the night before daylight savings time. We all work until 3:30 a.m. at which point we have a party. The party consists of waffles and a cheese tray. How we can afford to treat our people that good, you ask? Well, it’s all thanks to Ben Franklin and a little thing that we like to call the TIMESHEET because at precisely 2 a.m. we set our clocks ahead to 3 a.m. With a staff of 52 and an average billable rate of $120, our firm pockets an extra $6,240 just for staying up late and “springing ahead”.
Talk about leveraging people power! The lever is the timesheet and the hands pulling it are the hands of our clock. Hey, relax; we know this doesn’t work for our affiliates in Arizona or Hawaii. And we are very careful in that we forbid our people from working late when we “fall back”. (Imagine that: we’ve thought it through even though we don’t have the luxury of a think tank.)
Boom! Did you hear that? That was the sound of another hole blown in the hull of the Good Ship VeraSage. Sorry, Cap’n Ron.
In one of the all-time great movies 
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