VeraSage

Timesheets on the defense Down Under

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.

Chef’s Table Offering

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!

Price Options for a Newspaper

Ed Kless - 07/20/2010

A Sage Partner and friend of mine, Steve Bond from TAG, sent me an example of pricing options he received from a newspaper. The options were as follows and presented in this exact order:

• 1 Year Online & Print Subscription $149.00
• 2 Year Online & Print Subscription $385.39
• 6 Months Online & Print Subscription $148.34
• 3 Months Online & Print Subscription $83.74

Two questions: 1) Do you think this was intentional or just haphazard? Why or why not? and 2) Which option would you have chosen?

Note: This post has been altered from its original per a request.

Great Moderates In History?

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.

Ask VeraSage: Accounting for Intellectual Capital?

Ron Baker - 07/13/2010

I’ve been having a dialogue with a consultant for the last two years, and we recently had a very interesting discussion on intellectual capital (IC).

I thought you might find it of interest, since IC is what the professional knowledge firm is all about.

Our exchange focused on whether or not it is possible—or even desirable—to attempt to value IC, and perhaps placing that value on the financial statements, or a set of parallel statements.

Doug was not advocating this approach, just questioning the validity of doing it, and what the impact would be. I’ve had many other discussions with consultants and CPAs about, for instance, placing the value of a company’s brand on its balance sheet.

Should we account for IC, like GAAP accounts for transactions? Should IC be on the financial statements?

We both conclude no. Here’s why.

Hi Doug,

We do use IC as an integral part of a professional firm’s business model, which is why we refer to them as Professional Knowledge, not Service, Firms. PKFs sell IC, not time.

As for measuring IC, I find the work of others in that area interesting, and have met my share of firms that offer formulas and frameworks to value IC. All fascinating, but I’m still trying to answer, “What’s the point?”

Some insist they want IC to be put on the firm’s financial statements, which will and can never happen, since accounting is designed to capture value after a transaction, not value it before hand.

You certainly could devise parallel financials for IC, but again, what’s the point? The argument is to force managers to think about it, value it, etc.

But it seems to me that this is the “What you can measure you can manage mentality,” and with IC, effectiveness is always and everywhere more important than efficiency (the latter of which is always a measurement, where the former is always a judgment).

Since value is subjective, any formula or model for IC will be flawed from the get go. Not that it’s not a worthwhile exercise, such as how Interbrand values the world’s leading brands, but it’s the illusion of accuracy and precision. I’ve seen companies pay well over IC value calculations because value is subjective.

So, I come back to what’s the point of this? What’s the service being offering by valuing IC? What’s the value of doing so? I don’t think it’s as obvious as IC folks make it out to be. As you know, I wrote an entire book, Mind Over Matter, on this topic, but didn’t try to value IC—it can’t be done with any reliability.

Thanks Doug, look forward to your thoughts.
Ron

Thanks very much, Ron. 

This is exactly the kind of response I was hoping for—informed and critical. I’m slowly committing Mind Over Matter to memory, so I have deep respect for your opinions. 

I have a lot of skepticism myself. I take your point about accounting being the trail of the past. I have heard the argument that by putting NPVs on assets, is bringing the future into the present, and isn’t it true that IC is exactly about the future, and that is why [we need] a breakthrough in accounting? It is supported by IASB standards on intangible assets and impairment, which also track with FASB standards 38 & 38.

But the IC side intrigues me, because so many people believe there is such a need to recognize (and quantify and monetize) your subtitle (intellectual capital is the chief source of wealth). I think this belief is even more strongly held in the wake of the debacle over people pumping up risky underpinnings (lousy mortgages, among others) into highly leveraged clouds of crap. A wealth creation engine based on human knowledge, experience, relationships, performance, and results seems like a more positive economic foundation. But how to capture, how to harness? 

Thanks again for your quick and thoughtful response. One of these days I’ll buy you a beer, or a glass of your favorite wine

Cheers, and great thanks,

Doug

Hi Doug,
I understand the argument, my problem is knowledge is also a social construct—it simply cannot be quantified, tracked, and put into a formula.

There is certainly value in valuing IC for a business sale, and indeed that is what happens. This is why accountants call the sales price over the book value “goodwill"—just a word that describes their ignorance, i.e., their inability to value an enterprise, only capture it after a transaction takes place.

But even formulas for IC won’t capture the subjective value of an enterprise. How many times have you seen a company pay way above a company’s value, as assessed and computed by business valuators? It happens a lot, and that’s because value is subjective.

And no, I do not think putting NPVs on assets is bringing the future into the present. Accounting can’t do that, and even if there existed formulas, they would be full of errors and inaccuracies.

Here’s another reason: knowledge is actually about the past, whereas entrepreneurism is about the future, and you can’t capture the Black Swans of entrepreneurialism by formulas. No amount of sophisticated IC formula could have predicted, captured, or harnessed eBay or Google. It takes the
risk-taking of entrepreneurs to create new wealth. Anything we can capture, measure and harness is almost by definition about the past that is already dying.

I’ve come to the conclusion that we’ll never be able to measure IC. So what?

We know it’s there—like dark matter in the universe—but there are too many variables. It’s spiritual, not material—meaning you can’t measure it.

To believe otherwise is the materialist fallacy—that everything needs to be measured to be understood. It doesn’t work—see the USSR, Cuba, North Korea and any other communist country.

This doesn’t mean we should ignore IC, only that trying to measure and value it is futile—like plunging a ruler into an oven to determine its temperature. It’s the wrong device.

There’s lots more to say on this topic, but it does make my brain hurt.
Ron

Doug made the final salient point about IC, what Joseph Schumpeter called the Creative Destruction of capitalism:

The key point is that the value does not arise from the accounting of it, however elaborate the accounting scheme might be, but rather in the context of a marketplace that is focused on performance and results, enhanced by a skunkworks generator, etc. 

Would love to hear your opinions on this topic.

HSD: Young Professional from New Zealand Reviews Mind Over Matter

Ron Baker - 07/12/2010

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:

1. 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.
2. 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.
3. 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.

Ask VeraSage: A Majority of Our Customers Don’t Want Value Pricing?

Ron Baker - 07/11/2010

Ron,

Long time ago you answered my Carthage question and with my current company we tried a few times to sell fixed price packages.

Some clients bite it although many ask us to switch to the hourly rate. What I observe is that it’s easier (read, they’re used to) for the clients to get quotes and compare hourly rates than match and analyze various criteria from different service providers. Sometimes it gets even worse: the client wants an hourly rate but at the same time to cap the SOW [Scope of Work] with the total allowed maximum sum.

That leads to the very same ethical issue when project managers effectively get the red line and mentally the mission to bill the client as close from the bottom to the limit as possible.  I tried to put all the cards on the table: propose the hourly-based project plan, come up with the estimation and then bid with the fixed price which is lower? Surprisingly even in such cases some clients ask for the hourly rate motivating that they can easier pass it through the budgeting group and legal.

I’m ready to accept the hypothesis that we run into the clients which don’t understand the value-selling benefits, maybe we don’t articulate enough, maybe they don’t trust the approach for some reason but certainly in our case such clients are majority in our pipeline.

What do you advise to undertake?

Thanks,
[Name Withheld]

Hi [Name Withheld],

I think the last part of your fourth paragraph answers your question.

It’s obvious the firm isn’t doing an effective job articulating its value proposition—by that I mean, comprehending, communicating, and convincing the customer they must pay for value.

Don’t despair, this is common, though not to the level your letter seems to suggest. It’s usually a minority of customers, not a majority as you say.

You need to stop talking about hours completely, and just tell your customers you don’t price that way. It’s unethical.

No client can tell you how to price—that is your decision. Also, your firm doesn’t do timesheets or track time. You have better things to have your knowledge workers do—such as add value and provide outstanding customer service to customers. Then what will the customers say who want to see hours? Force you to do timesheets? Then they aren’t the right customer.

If you’re not willing to do the above, Pricing on Purpose will never become a core competency in your firm. There’s simply too much empirical evidence from all the firms out there that customers love this approach. The push back we get is from firms, not customers. I know this for an absolute fact, since I’ve spent the last four years speaking to customers across all professional firms and they all say the same thing: they want certainty in price, period. It’s how they buy everything else.

Do you have people pricing and selling who aren’t good at it? Then upgrade their skills or remove them from pricing.

Blaming it on the idea that your customers don’t prefer fixed pricing is a cop out and simply doesn’t comport to human behavior and the laws of economics.

The only other thing I can think of is your customers do not trust you; and that’s not a pricing problem. That’s much deeper. I hope this is wrong?

Either you want to do this or you don’t. Your customers are not an excuse.

I hope that helps.
Ron

Of course, we welcome the thoughts from other firms that have made the transition from hourly billing to Value Pricing.

Ask VeraSage: Does Value Pricing Work for Photography?

Ron Baker - 07/11/2010

Hi Ron,

I hope all is well with you and Value Pricing. I’m sure you don’t remember me, but I was in the IT industry for many, many years as a Sage Partner and was in the small Value Pricing group started by Ed Kless.

If you recall, we had the special training groups, one in Windsor Ontario, and others at the Sage conferences, etc. Well I am no longer involved in that industry and a couple years ago decided, at my age, to have some fun and follow my true passion of photography. So for the last year or so, I have been building an infrastructure, upgrading and purchasing photo equipment, building a web site, and off on photo shoots with the intention of building a photo business.

Have you ever applied the VP concept to a photography business? Photography is such an illusive medium in that it is so personal to the viewer. How would one go about perceiving the value and charging accordingly? I’m not sure how or if it could work, but I think there is room for a lot of improvement in how good photographer’s can increase the value of their work in the client’s eyes.

I belong to a number of photo specific forums, camera cubs, etc. and a huge and ever present topic is pricing of custom photography; how customer’s want great photography for very little. Most people have no idea and don’t understand the amount of skill, creativity, training and equipment that goes into being a good photographer and the value that is created in all aspect’s of life and business.

Any thoughts and ideas you may have are welcomed.

Garry

Hi Garry,

Congratulations on following your passion. That by itself is an enormous accomplishment! I toast you for making such a courageous decision, since so many people do not follow their dreams.

Value Pricing absolutely works in the photography business. I know this from working with advertising agencies, who have to buy the Copyrights to photos, sometimes at a very high price!

One of the best strategies you can deploy is to offer your customers options. I’m not intimately familiar with your business, but things like black and white vs. color, who will own the Copyright, for what time period, where the pictures will be taken, etc.

Think about what drives value to customers? There has to be a myriad of things for a wedding gig that you could offer up as a Green, Gold, Platinum, and Black card offering (to use American Express’ offerings as an example).

We have been having incredible success with options, mostly for this reason: it changes the customer’s focus from “Should I work with them/” to “How should I work with them?” That’s a great mindset to get your customer in and block out the competition, making price less of a factor.

Remember, most customers don’t care about, or indeed know, all of the complexities that go into your craft. Nobody wants to hear about the labor pains—we want to see the baby. Make it look easy, but give the customer options, and your value proposition will be distinctive.

You may also find my new book to be helpful, due out from John Wiley in December:

I hope that helps, Garry. Keep me posted on your progress, and again, congratulations for chasing your dreams.
Ron

The Only KPIs Your Firm Will Ever Need

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.

New Trailblazer: CS3 Technology

Ed Kless - 07/07/2010

Today, we welcome a new Trailblazer to VeraSage: Gary Crouch and his team at CS3 Technology in Tulsa, OK.

Gary’s most profound insight is, “My function then as the leader of a team of knowledge workers is to attract intellectual capital to my team.”

Click for the full article.

Ask VeraSage: Advice to a Value Pricing Champion

Ron Baker - 06/24/2010

I met Len Pepe back in 1997 when he was a partner at BDO. Len took to the Value Pricing message like a fish to water, even providing a blurb for the very first edition of my Value Pricing book.

We reconnected recently, and Len has moved to another firm in Boston: CCR LLP. We’ve been exchanging emails on his attempt to implement Value Pricing in the firm.

Most firms have an internal champion that is incredibly enthusiastic about VP, and it’s not always a partner (although Len is).

We understand how hard it is to transition to VP—I like to say the concept is revolutionary but the implementation is evolutionary.

Len recently sent me the following email:

Ron,

Tomorrow I have my Alternative Billing Arrangements Task Force meeting and then I have to report to the Equity Partners.

Do you have any words of wisdom as to:

• Other CPA firms that this has worked successfully for in this area— as I know how well it works for Law firms (Jay Shepherd and Chris Marston).
• Do you run a simultaneous time system to see where you are with profitability for the na-sayers?
• Will it work as well for audit departments as it would for tax departments?
  

Any insight is appreciated—it’s coming down to putting up or shutting up for me.

Thanks my friend,
Len

Here’s my reply:

Hi Len,

Here’s some Words of Wisdom guided by experience:

If the firm is serious about making pricing a core competency (this is what we mean by Pricing on Purpose), appoint a Value Council and a Chief Value Officer (CVO).

Don’t call it “Alternative Billing,” as billing is always done in arrears, after the work has been performed.

Instead, call it Fixed Pricing (with the client anyway, hence the Fixed Price Agreement term), because pricing is done upfront, before the work begins.

There are literally thousands of firms that have successfully implemented Value Pricing, some of their stories you can find on VeraSage under “Trailblazers.”

There’s a top 100 accounting firm that has also appointed a Pricing Panel and a CVO and has about one-third of its revenue under VP (but it hasn’t gotten rid of timesheets—yet). There are also law firms, advertising agencies, IT and consulting firms where VP is being used.

You can access an article I wrote for the Journal of Accountancy article profiles four Firms of the Future:

You can also access an article I wrote for the Journal of Accountancy on Pricing on Purpose, which also includes 11 Exhibits firms can use to aid implementation.

A simultaneous time system is almost inevitable, because very few firms have trashed timesheets before, or at the same time as, implementing VP.

But between you and me, I do believe trashing timesheets is the only thing that will make a firm better at pricing. As long as timesheets exist, we look back to time to measure price—precisely what we are trying to get away from.

VP will work in any department. In fact, it’s not department-dependent; it is customer-dependent.

I don’t think a firm should allow different pricing based on departments, especially if the customer experiences more than one service. Imagine being billed by the hour for one thing, and given a fixed price for another.

We are doing VP for the benefit of the customer (to give them certainty, a “no surprises” rule), and thus that experience is created one customer at a time, not one department at a time.

Although VP is revolutionary, its implementation is evolutionary—one customer at a time. We always suggest to firms that are serious, but are not ready for a value council and/or CVO to do all of its pricing, the following steps:

1. Each partner do five Fixed Price Agreements over some time period (one to three months)
2. No partner gets to price their own work. You have to bounce every price off someone else. I’m a wimp when it comes to pricing my services, but I’m brave as a lion when pricing Len’s because I know how much value Len creates and I hate to see him give it away.
3. Be vigilant about scope creep and using Change Orders. It’s very rare that any but the simplest engagement is not going to have scope creep. When it happens, you must discuss with the client, and agree upon the price.
4. The Golden Rule is: No surprises to the client. In fact, many firms offer a price guarantee: if the client ever receives an invoice that was not agreed upfront, they don’t have to pay. This forces us to price everything, no exceptions, before we do the work.
5. Perform an autopsy (After Action Review) on every FPA done, using the questions from the JofA article above (in one of the Exhibits).
   

Does that help?

Good luck Len!
Ron

Any other suggestions for a quick-start to VP for Len would be greatly appreciated.

What I Believe Redux

Ed Kless - 06/21/2010

Two weeks ago, in a post entitled, What I Believe, I put forward a declaration. It went thusly:

I believe in challenging the status quo. The way I challenge the status quo is helping professionals change their business model from a focus on service to a focus on knowledge. It happens to be a better model. Are you interested in changing?

In the fortnight since that post, I have been tweaking it in my mind and I am please to put forward this updated declaration.

I believe that small business is where the vast majority of the wealth of the world is created. I help small professional businesses recognize that they do this through developing and sharing their knowledge. It is a great model. Do you want to know more?

I am curious as to what your thoughts are about this. Did any of you make a declaration? If so, are you willing to share it below? What are your thoughts on my declarations? Do you think the second is an improvement?

Seth Godin Is Wrong

Ed Kless - 06/18/2010

I have read most of Seth Godin’s books and am an occasionally reader of his blog. On June 9, 2010, in a post entitled Hourly work vs. linchpin work, he wrote the following:

You should pay people by the hour when there are available substitutes. When you rely on freelancers you can put a value on their time based on what the market is paying. If there are six podiatrists in town, and all can heal your foot, the going rate is based on their time and effort, not on the lifetime use of your foot.

There is no other way to say it, this is just plain wrong.

Once again, a really smart person has fallen prey to Marx’ Labor Theory of Value. Effort does not have value, results do. The value of a podiatrists healing your foot is based on the lifetime use of your foot. This does not mean that the price is solely based on that lifetime value.

All value is subjective, not objective. Assuming a free market for this service (laughable considering it is healthcare), the “going rate” is not based on the time and effort of the doctor, but what a patient is willing to pay the doctor, period. Increased supply does bring price down, but not because any change in time and effort.

Reasons Why I Do Not Like Soccer (and some proposed solutions)

Ed Kless - 06/15/2010

This has nothing to do with Pricing on Purpose, but I since we have quite and international following some of you might enjoy it. Others will want to take me on, so please do so.

1. Too low scoring. As a baseball fan I do enjoy the occasional pitcher’s duel, but most Major League games average over 4 runs per team per game. With soccer it is ridiculous, it is always a defensive battle. The solution is three balls in play at the same time. Better two white balls and one red ball, with the red worth three points instead of one! Not only will this increase the scoring, but it will increase the number of breaks in the game, this will allow more beer commercials to be shown.
2. Too many ties. North Americans do not like vaguery, we want a clear winner and loser especially in a once every four years competition. It really get crazy in the bracket rounds of the World Cup when after a brief overtime, they go to penalty kicks. This would be like a baseball game ending in a tie after 12 innings and then deciding the winner by playing home run derby. Nonsense! I would like to see them keep playing until they fall down from exhaustion except for the goalies. How cool would that be? Goalie on goalie until one of the scores! Of course, adoption my three ball proposal would also help reduce the number of ties.
3. The clock is not the clock. Again, this is a problem with vaguery. I mean really, only the referee knows when the game is going to actually end. I know they have added the approximate extra time, but still, it is way too arbitrary. Technology must exist to allow the referee to add this time exactly onto the clock. Oh, by the way, the time runs in the wrong direction. We want it to count down, not up. This ain’t track and field!
4. This one is specific to this World Cup - vuvuzelas. Sorry, they are worse then the insidious thundersticks that occasionally make their way into various North American events. The worst offense being the 2002 World Series between the Los Angeles Angels of Anaheim and the San Francisco Giants. There has got to be a way to filter this sound out of the feeds.

Help Me Understand?

Ed Kless - 06/14/2010

One of the key devices I use as a consultant is something I call the “Help me understand” question. I use this when there is an apparent contradiction between two statements or behaviors of a person.

The structure is this: Help me understand how A (one behavior or statement) is in alignment with B (the other behavior or statement)?

For example: Help me understand how letting one of your best people get away from your organization is in alignment with your company’s stated goal of attracting and retaining great people?

Sometimes this leads me to some very good insight and a much deeper understanding of the issues. Very often, I am convinced that A and B are, in fact, in alignment and that what was lacking was my deeper understanding.

Other times however, the person I am working with is unable to reconcile the dissonance and adjusts their behavior or statement accordingly.

Still other times I receive no feedback from the question, especially if I pose it in email. I can only assume that they make no adjustment and go on living a contradiction.