Community Section -
Ron Baker - 01/31/2007
Chris Marston, CEO of Exemplar Law Partners and VeraSage Fellow, has another great post over at his Blog, Inside the Firm of the Future. In response to a question from a colleague, Chris explains the philosophy of Value Pricing and why it’s better not only for the law firm, but its customers as well.
He discusses the importance of managing customer expectations, scoping the engagement, and issuing change orders. He discusses why Menu Pricing is not exactly Value Pricing, and also explains staging (what I call phasing) for projects that are complex, uncertain and long-term in nature (such as litigation).
Check out the post, Understanding the Subtleties: Fixed Pricing That Works & Fixed Pricing That Wont!
Ron Baker - 01/30/2007
The following is an E-mail I received from the CEO of an Advertising Agency on January 26, 2007 that has begun to implement Value Pricing, and has had stellar success so far. As usual, at this point in the transition, the questions arise: “What about timesheets? Do we need them?”
The answer is unequivocally NO! Warning: this is a long post, but if you’re interested in why timesheets don’t matter, read on.
Ron,
I left you a voice mail message earlier this morning, but thought you might prefer to save the long distance phone charge and respond by e-mail.
We are a member of the AAAA’s and MAGNET—and I’ve heard you speak through both organizations. Tim Williams is a consultant and friend.
We have come a long way with value pricing and have actually moved from a history of getting around $80,000 of gross income per employee to our 2006 level of $130,400 per employee. Tim Williams tells me he knows of agencies who get $150,000 to $170,000 per employee. We aren’t planning on moving to a completely consultative business model, so I don’t know if we will get to those levels or not, but we don’t think it impossible to get to the $145,000 level with our projections for our gross income in 2007.
In recent industry news, some big New York agencies are claiming “We sell ideas, not time!”
So, does this mean they really have eliminated the use of timesheets?
OR
Are they still using timesheets internally to track the manpower/resources needed to provide the thinking and services and then selling that thinking and those services based upon their perceived value to the client? (Which is what we are currently doing).
We sincerely want to motivate our people to achieve what we want to accomplish.
We want to create great creative ideas / strategy / work that help our clients build their brands and sell more!
So, we don’t want to send the wrong signals to our people that we care more about billing 75% of their day than a great idea. That said, I still need some kind of measurement to know what our “costs” are so we can sell value and measure margin. Is it possible to do this AND eliminate timesheets?
We buy into the concept (got this from you) that people buy things based upon perceived value—not caring how much time it takes to do it.
Having said that, if someone buys a $65,000 automobile based upon value, I know the manufacturer knows how much it cost to make that car and what their margins are.
So, if you would, please share your thoughts or observations on what you’ve seen other service business firms doing.
Thanks for your time and perspective!
[Name withheld on request]
CEO of an Advertising Agency
Ron Baker - 01/30/2007
I had the great good fortune in December of meeting the team at the Maryland Association of CPAs. I think it is the most progressive CPA State Society in the country, led by its visionary CEO and Executive Director, Tom Hood.
They launched their Blog in October 2006, and it is full of thought-provoking articles on the profession. They even have a presence on Second Life.
Ed Kless - 01/29/2007
I believe the time has come for us to attempt a definition of the Professional Knowledge Firm or PKF.
Many of us at the VeraSage Institute have been using this term in our postings quite often lately. Ron and I have been bandying about a definition for a few weeks, and at this point we would like to put it out there for your thoughts. Please weigh in, early and often.
Professional Knowledge Firms (PKFs) are organizations that create, disseminate, provide and sell intellectual capital to individuals or other organizations.
Typical business models revolve selling intellectual capital, either on a project-by-project basis, or through a service level agreement providing access to knowledge on an ongoing basis for a fixed price based on value, not efforts, time or costs.
In this sense they share much in common with Professional Services Firms but there are also key differences:
- PKFs do not charge for their time, meaning they do not bill by the minute, hour, or day, but rather a fixed fee based on the value provided to the customer.
- Effectiveness is more important than efficiency.
- Employees are not viewed as resources, but as intellectual capital investors.
Ron Baker - 01/29/2007
I received an E-mail this morning from Hugh Williams in Great Britain, author of the new book, Life Without Timesheets. I love Hugh’s analogy:
Dear Ron
Does this make sense? I found myself thinking of it yesterday.
Billing based on time sheets is like riding a bicycle with stabilisers. Before you remove the stabilisers you think: Help I could never manage without these. They make me feel so safe.
Little do you realise that, once the stabilisers have been removed you a) will go much faster and b) be a far better rider of bicycles.
So I now think that time sheets are for people with no confidence in their own ability. Strong stuff but (as I firmly believe) true.
How many more enemies will I have just made, I wonder?
Yours ever
Hugh
I used to believe a firm could implement Value Pricing and still maintain timesheets, as long as they were used for cost accounting purposes only, not pricing.
I no longer think this, and for what I believe is an empirical reason. After working with those firms that I would consider to be the best pricers in the Professional Knowledge Firm industries—comprised of accounting, law, advertising and IT firms—I discovered one commonality: the best pricers didn’t have timesheets. I believe this a causal relationship, not just correlative.
Those PKFs without timesheets have removed the training wheels. The firms that continue to maintain them always go back to them for value and pricing decisions. They don’t use them for cost accounting, since they already know their costs (they are, after all, mostly fixed). Anyway, we are not going to become better pricers by becoming more accurate cost accountants.
Take off the training wheels and watch your pricing competency accelerate. I firmly believe it is the only way to become a better pricer.
Brendon Harrex - 01/29/2007
Often in life we are fooled by the deception that delaying a job will somehow make it easier. This is why we often delay the hard tasks and put the easier jobs that we know we can complete to the front of the list.
The reality is that the longer we leave something, the harder it gets as we forget a lot of the important information. Also, the longer we leave something, the less likely it is to get done.
If your experience is anything like mine, your most effective week at work is the one before vacation as you have to deal with everything then and there. This is the difference between effectiveness (doing the right things) and efficiency (doing things right).
The reality is we all work much more effectively with a deadline. This is why turnaround is one of our new KPIs. If you are able to form the habit of dealing with information and/or events as soon as you become aware of them, your effectiveness and output will increase. Delaying hard tasks in the hope they will get easier with time is a misconception.
Have an effective week.
Ed Kless - 01/28/2007
(Quick writers note: Ok, I admit, Ron Baker has shamed me
into finally writing this post. His post on Chris Marston’s excellent blog has
motivated me.)
One of the basic principles of project management is what is
known as the triple constraint. Some call this the scope, resource, time
triangle. However, when I was the practice manager of a software implementation
consulting firm, one of the guys on the team, Dave Franz, dubbed it the
Triangle of Truth. (Franzy, if you are out there, you
should know I give you credit whenever I talk about it.)
The concept is simple. A project consists of three
interrelated variables: scope, resource (some say cost), and time. These
variables are like the angles of a triangle. If you recall from geometry class
in high school, in order for a polygon (shape) to be considered a triangle the
three angles must add to 180 degrees. I.e., Angle A (Scope) + Angle B
(Resource/cost) + Angle C (Time) = 180. If these do not add to 180 you don’t
have a triangle. So, if you make a change to the value of one of the angles,
one of the other two or both must also change to compensate or else the figure
is broken.
The big problem with most professionals is that they are
lousy and lazy about scope development. They prefer to concentrate on the
second two elements, cost and time. In some cases, the professional feels
pressure from the customer or prospect to give answers to the cost and time
questions first. To me this would be the equivalent of purchasing the lumber for
a new house before going to an architect for plans; or doctor writing a
prescription before performing a diagnosis. (Remember: prescription before
diagnosis equals malpractice!)
To refute this poor practice further, I need to reference one
of the giants of the consulting profession, Peter Block.
In his landmark book, The Answer to How is Yes!, Block posits
that consultants (read professionals) are usually presented first with what he
calls “How” questions. “How much will it cost?” and “How long will it take?”
are two of these questions — angles B and C in our triangle. Block argues that
while these are relevant questions, when asked too early, they “express our
bias for what is practical, concrete, and immediately useful. It assumes we
don’t know and this in itself becomes a defense against action.”
Scope (angle A), however, is a “What matters?” or “Yes!”
question according to Block, specifically the question is “What do we want to
create?” In order to properly begin a project with a balanced (or equilateral)
triangle we must ask and fully answer this question first. Why do we need a
balanced triangle?
If we go back to the analogy and take it one step farther, let
us draw a circle inside this triangle, the size of the circle represents the
quality of the work performed. The largest perfect circle can be drawn inside a
triangle that is equilateral, all sides the same and, therefore all angles
equal to 60 degrees.
This is an important point because for a professional
knowledge firm (PKF), quality is defined exclusively by the customer not the
professional. The professional cannot say that they do quality work. Rather,
their customers can say that about them.
What happens in most firms, as Chris so eloquently points
out, is that scope is often poorly or not-at-all defined. I am sent an email a
week from someone asking me to assist them with scope creep on a project. My
first response is to ask them to send me a copy of their scope document. In
almost all cases, I am sent back a proposal with a range of hours.
In replying to this I tell the poor sap that I say that have
some good news and some bad news. “The good news is you do not have scope
creep; the bad news is you are over budget.” What I mean is that since they
never defined scope to begin with they are not outside of scope.
(In a future post, I will visit each of the elements of a
great scope document.)
Even when they do a decent job of developing scope, some
professionals get caught in true scope creep. This happens when after having defined
a good scope, the project manager (professional)
allows more scope to be added to the project without rebalancing the triangle.
In other words, they take on more “What” and they squeeze the “How’s”. This is
what a change request is for, but that will have to be another post.
quod erat
demonstrandum
Ron Baker - 01/23/2007
One of the most fascinating things I have discovered, from my ten years teaching Value Pricing to professionals, was advertising agencies are more mired in the billable hour than law and accounting firms. This is astonishing when you think about it, since advertising agencies are the epitome of an intellectual capital profession. What else do they create and sell other than ideas? In addition, they have the potential to impact the pricing power of their customers, through brand positioning, differentiation, and other marketing strategies.
When I began working in this profession in 2005, I learned that agencies are expected to fill out spreadsheets, listing their overhead, salaries paid, and other costs of running their agencies. This is used in order to compute hourly rates, or a cost-plus price. This is the economic equivalent of a regulated utility only being allowed to earn a certain Return on Investment on its cost of capital. It doesn’t work very well with utilities; it’s pure insanity in a free market.
Since 2005, I have had the great good fortune of working with the American Association of Advertising Agencies, under the leadership of Tom Finneran, presenting Value Pricing seminars around the country. In 2006, I had the pleasure of meeting Tim Williams, and we have combined our intellectual capital, presenting a series of programs last year for the AAAA. This year, Tim and I will be presenting Value Pricing programs for agencies in Chicago and Las Vegas, as well as for various agency associations.
More exciting, we will launch our LIVE model, Leading Indicators of Value Evaluation, a new revolutionary model that we believe will help advertising agencies make the transition from cost-plus pricing to Value Pricing. Tim is a Senior Fellow of VeraSage, author of Take a Stand for Your Brand and president of Ignition Consulting. Tim is a thought-leader in the advertising world, and it has been an enormous pleasure to be able to work with him.
Tim was recently listed as a resource in the print version of an AdvertisingAge article entitled, Fed-up Agencies Quit Punching the Clock, from the January 22, 2007 edition. You can read the online version here. I was heartened to read some of the quotes in the article from Crispin Porter & Bogusky and Anomaly, two agencies that don’t do timesheets, don’t price by the hour, and utilize Value Pricing. Crispin is on the most innovative agencies in the profession at the moment and according to Jeff Hicks, “We’re in the intellectual-property business. We don’t sell time.”
Anomaly, a New York-based agency started by ex-TBWA executive Carl Johnson also doesn’t have timesheets. I love this quote from Anomaly partner Jason Deland: “We price ourselves on the subjective theory of value. That allows us to structure more varied, entrepreneurial compensation agreements.”
For as much as people love to bash, or outright ignore, theory, the fact is there is nothing more practical than a good theory. The labor theory of value, which is the talisman for the majority of Professional Knowledge Firms, is inflicting incalculable damage to both firms and the customers they are privileged to serve. It focuses on inputs, costs, efforts, efficiency, and activities, all at the expense of output, results, effectiveness and value. It is failing both firms and customers. It’s time to change the conversation, and learn from the trailblazers such as Crispin and Anomaly that are brave enough to chart a new course in their profession.
As more and more agencies adopt the subjective theory of value, we will create a critical mass. The one question I find infinitively fascinating is which profession will reach the “tipping point” first—accounting, law, technolgoy or advertising? If I was a betting man, my money would be on the advertising agencies.
Ron Baker - 01/23/2007
Chris Marston, CEO of Exemplar Law Partners and VeraSage Fellow, has some excellent posts over at his blog, Inside the Firm of the Future.
His January 1, 2007 post, You Have to Know How A JibJab Works Before You Can Fix A Broken JibJab! is a compelling exposition of why the legal profession is failing to execute Value Pricing.
His next post from January 8, 2007, SCOPE: It’s Not Just A Mouthwash! It’s What You Do When You Use Fixed Pricing! is one of the best explanations I have read on the importance of defining scope, managing and understanding customer expectations. Scope creep is the number one killer of Fixed Price Agreements, and the billable hour has let professionals become quite lazy about this important discipline.
After all, with the billable hour, who has to care about defining scope? Just pick up the file and plug in the hours. This is one of the Seven Deadly Sins in the Professional Knowledge Firm. Just as pricing needs to become a core competency within PKFs, so does project management. VeraSage Senior Fellow Ed Kless is an expert on this topic, so I’m sure we will be seeing more posts relating to this important subject in the future.
Chris’ post from January 15, 2007, Time-Based Accounting is Behavior Modifying to the Detriment of Profits, is another fantastic exposition on how endemic Karl Marx’s labor theory of value is in the legal profession, to the detriment of not only profits, but quality of life.
On a more whimsical tone, his post from January 23, 2007 links the billable hour to cancer. As one who believes that ridicule and humor is sometimes far more effective than logic, I commend Chris for making fun of the billable hour. It’s about time. Aren’t people bored with this method yet?
Great work, Chris, keep it up!
Brendon Harrex - 01/22/2007
Managing your mind should be one of your top priorities. Like a computer, your mind only spits out the data you feed it. Winners work hard at investing the right material inside themselves. There is a tiny membrane in the back of our head known as the “RAS” (Reticular Activating System). The primary function of your RAS is to move you in the direction of your dominant thought at that moment. We naturally act on what fills our minds.
When we become preoccupied with a thought, eventually we want to act on it. This explains a lot of things—such as increased violence among young people between the ages of 12 and 24 years. By then the average young person has seen more than 4,000 murders on TV, not to mention video games.
Universities have studied how the images received impact our brains. For example, adolescents who had a high level of exposure to violence had reduced levels of cognitive function. The more violence they saw the less thinking, learning, reasoning, and emotional stamina they had. Their computer stored the wrong information—now they could only retrieve the wrong data.
We all have limited time to invest in ourselves due to other commitments we may have such as work, family, sport etc. Be careful what you feed your mind, as whatever you input is likely to end up as an output sooner or later.
Brendon Harrex - 01/15/2007
Often we are paralyzed in making decisions in life because we cannot see the consequences of those decisions at the time we make them. If we were to make decisions that we knew the outcome of before we started, our progress would be very limited. When we can see something, we are usually very comfortable, however since we cannot see very far, living by what we see and know keeps us living small.
The African Impala is a marvellous animal that can clear 3m high and 10m forward with just one jump. However, put that Impala in a 1m cage with no roof and it will not attempt to escape, even though it has more than enough power to clear the cage. That is because the Impala will not jump if it cannot see where its feet are going to land. The Impala lives by sight, so it is easy to keep it caged. The same applies to you.
Key victories in history have come because someone was brave enough to make a decision on what they believed at the time, even though they did not know entirely where that decision was going to lead them.
Is your progress being stifled by a need to see all the outcomes of a decision before you make it?
Have a great week.
Michelle Golden - 01/07/2007
...and learn that that Jay Shepard believes there are “three reasons, all of which are related”
1. Billing by the hour
2. Using legalese
3. Giving legal answers instead of business answers
He says these three things are all “examples of lawyers putting themselves first, instead of putting clients first.” I couldn’t agree more. Read Jay’s blog post here.
Ed Kless - 01/03/2007
It is my pleasure to present the first VeraSage Trailblazer from the technology arena - Koenig Software Systems, LLC of Houston, TX.
Ken Koenig and Linda Kay attended Sage Software’s Project Management and Value Pricing Boot Camps in 2006 and we inspired to create consulting agreements based on the Adaptive Capacity Model we teach at VeraSage. Despite being warned that they should start by developing the normal model first, they opted to develop their high-end Black Card offering first. We are sure glad they didn’t listen to us.
For their whole story, visit the post on the Trailblazer tab.
Ron Baker - 01/02/2007
Matthew Tol from Australia began E-mailing me in November, 2006, after coming across the VeraSage Web site. We had a fantastic exchange on the importance of customer selection, grading, pricing and the total ineffectiveness of timesheets. Matthew had written a couple of articles before and during our exchanges, and while we may not agree on everything, I’m happy to report that his firm will be trashing timesheets June 30, 2007.
You can read our entire exchange, including Matthew’s articles, in our Trailblazers section (it’s a long post!).
Congratulations again Matthew on becoming a Pioneer in our profession.
Ron Baker - 01/01/2007
My mentor, George Gilder, has a profound post on his Blog from December 21, 2006—Law Number One of the Telecosm.
It’s profound because it’s quoting another of my mentors, Peter Drucker, in one of his last live appearances—a keynote address to a Forbes conference in Seattle for CEOs.
I won’t ruin it for you. Please read it. It’s not only profound, it’s true. And the truth hurts. I would love to hear your thoughts on this, since it’s a topic near and dear to my heart.
RSS Feed
Comments | 0 Trackbacks | Permalink | Ask VeraSage? Pricing on Purpose (aka Value Pricing) Choose an Industry: Law