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Ed Kless - 02/28/2007
In a recent article by Lowell Bryan, a director in McKinsey & Company’s New York office, the author postulates that the “new metric of corporate performance” is profit per employee. He begins “Let’s get right to the point: companies focus far too much on measuring returns on invested capital (ROIC) than on measuring the contributions made by their talented employees.”
True enough, but while I believe he has seen the tree, he has still missed the forest. Profit per employee is based on the assumption that profit is an accurate measure of return on intellectual capital. In a dialogue with Ron Baker via Skype he noted, “I’m dubious. They seem to take GAAP at face value, and the problem is GAAP! GAAP doesn’t deal with intellectual capital. Intellectual capital is a theory, GAAP isn’t. So dividing profit by employees doesn’t tell much. [It would be] like using a ruler to measure the temperature of your oven.” Classic Bakerian wisdom that.
I, however, humbly posit the following:
Revenue (not profit) per employee (RPE) is meaningful especially when the change in RPE is measured over a consistent time period and when compared to other companies in the same industry.
Here is my argument. Revenue, per Peter Drucker, is the captured value that an organization provides to its customers. Number of employees is the number of human brains (usually) at the company. So, dividing captured value by number of brains is a measure to at least some degree of the usage of intellectual capital. It is not predictive, nor does the customer care about it, so it has two strikes against it from a Measure What Matters point of view.
It does, however, have meaning to the employees of the company. I believe it could be used to gauge how smart we are as a group, especially when compared to others. The two ways of affecting it would be to either a) capture more value while not increasing braincount or b) capturing similar value while decreasing braincount. Either way a Professional Knowledge Firm would have to see value pricing as a way to deliver on this.
This is not to say that we should ignore profitability. Doing so would be foolish. But looking at Profit per employee does not make much sense to me.
Fellows, readers, your comments please.
Ron Baker - 02/26/2007
Note: In September 1997, I attended a 3 1/2-day course at Disney University in Orlando, Florida at the Disney Institute. I subsequently wrote a three-part series of articles for the CPA Profitability Monthly newsletter, then published by Harcourt Brace Professional Publications. Thousands of reprints of these articles were ordered. I recently came across them while working on my next book on intellectual capital. I thought our VeraSage colleagues would find them interesting.
“I only hope that we never lose sight of one thing-that it was all started by a mouse."—Walt Disney
When Walt Disney returned home from Europe, after serving as a driver for the American Ambulance Corps (part of the Red Cross) during World War I, his father wanted him to work in his jelly factory at a salary of $25 per week. Walt was not interested, and his father, becoming perturbed, asked him: “Then what do you want to do, Walter?”
“I want to be an artist,” Walt replied. “And how do you expect to make a living as an artist?” his father queried. Walt admitted: “I don’t know.” Indeed, Walt didn’t know how he was going to make it as an artist. Looking back on this episode now, with perfect 20-20 hindsight, the question of Disney’s ability to make a living seems preposterous. But Walt Disney understood one thing about business very well: where profits come from and what an organization has to do in order to maintain them.
WHAT EVERY BUSINESS PERSON SHOULD KNOW
Think back to your Economics 101 course and recall the three factors of production: land, labor, and capital. If land provides rental income, and labor generates wage and salary income, and capital earns interest income, where do profits come from? When I ask this question of professionals in my courses, the response is usually, “From combining all three factors.” That’s partly true, and certainly that is the function of an entrepreneur. But it’s not the real answer.
Profits come from risk. There is no other way they could ever materialize. Entrepreneurs are society’s perennial risk takers. Some lose; some win. But profits are the result of giving to others, humbling yourself to their needs first, long before you can expect to take anything in return. It is the process whereby you put your entire fate into the hands of others—your customers—and provide them with a service that is so good they willingly pay you a profit in recognition of what you’re doing for them.
Walt Disney understood this process, and he took many risks during his lifetime. Some failed terribly, while others gave him the profits necessary to build the empire that exists today. Perhaps this attitude was instilled in Walt while he delivered newspapers on his dad’s route. Walt’s father wouldn’t allow his sons to deliver the papers from bicycles, carelessly throwing the papers onto porches. He insisted they lay the papers on the doorsteps, and during wintertime they had to be placed behind the storm doors. Walt learned, at a very young age, the necessity of exceeding the customer’s expectations.
When I hear people say they’re in business to make a profit, I know they are chasing the wrong rabbit. If you’re in business solely to make a profit, you won’t. Profits are a lagging indicator of customer behavior. In fact, if you look at any organization—from a nonprofit to a government bureaucracy—all of its results exist externally. The result of a hospital is a healthy patient; the result of a school, an educated child; and the result of a business is satisfied customers. The notion of “profit centers” in a business is a misnomer. There’s no such thing. Internally, in any organization, there are costs and efforts. As Peter Drucker points out, “The only profit center you have is a customer’s check that doesn’t bounce.”
This way of thinking is a paradigm shift for most business people, especially MBAs, CPAs, CFOs, etc., who tend to look only at the financial side of the business world. But the real action of business takes place in the hearts and minds of customers, and those feelings can’t be measured by Generally Accepted Accounting Principles, nor can they be attested to by auditors. Yet they are the most important indication of business success (or failure).
A CAMPUS BUILT ON A VISION
During the research for my CPE course, Total Quality Service, I constantly ran across stories of extraordinary service from Disney. I’ve always been impressed with Disney and its total commitment to the “Guest” (Disney parlance for customer). Then one day I heard about Disney University (now part of the Disney Institute). It offers professional development programs to outside organizations. I had to attend.
In 1955, after the opening of Disneyland, Walt established the Disney University, the purpose of which was to train Disneyland’s 600 Cast Members (Disney parlance for employees) “to be aware that they’re there mainly to help the Guest.” This training continues to this day, and all new Disney Cast Members attend a one-and-a-half day Traditions course. The wording is very precise. They are not “orienting” their Cast Members, but rather passing down traditions. Even every Disney CEO attends.
The Disney Institute is now home to unique, innovative, and powerful professional development opportunities. Since its creation in 1986, the Disney Institute programs have taught the core philosophies and successful business strategies of the Walt Disney World Resort to thousands of professionals around the globe.
These programs offer a tremendous opportunity for you to benchmark with one of the leading service firms in the world. Not only do you get the latest theories with respect to the topic being explored, but you also see how Disney puts these theories into practice, by going behind the scenes. The “field experiences” take you out of the traditional classroom and place you in the “living classroom” of the Walt Disney World Resort, and you get to experience a first-hand look at behind-the-scenes areas of the Resort that few Guests ever get to see.
VERY HIGH EXPECTATIONS
We’re all, by now, familiar with how customer satisfaction is measured:
Customer Satisfaction = Perceived Performance ÷ Customer Expectations
I arrived at Disney Institute with very high expectations, to say the least. I had talked with a few individuals who had attended, as well as read quite a bit of good press on its programs. As any world-class service provider knows, customer satisfaction is no longer enough to ensure customer retention and loyalty. In fact, according to the Harvard Business Review, 65-85% of customers who chose a new company said they were satisfied or very satisfied with their former supplier. In today’s marketplace, a company has to exceed customer expectations and achieve customer delight.
In 1996, 75% of the Guests at the Walt Disney World Resort were repeat visitors. More than 100 million Guests have made more than 500 million visits to the Walt Disney World Resort in its 25-year history (as of 1996). Some Disney resorts have achieved a return rate of over 90%. Impressive numbers from an organization whose daily attendance averages 86,000. I attended the Disney University eager to discover how they achieve these results.
OPENING SESSION
The Disney Approach to Customer Loyalty: Creating Service that Keeps Your Customers Coming Back was a new course being offered by the Institute when I attended in September 1997. I chose this course because of its natural fit with the Total Quality Service programs I teach.
The program began at 4:30 Sunday afternoon. The 63 participants got a chance to mingle. It was a diverse group with participants from California, Minnesota, Singapore, Uruguay, and everywhere in between. Industries such as healthcare, retail, and banking, nonprofits such as the YMCA, educational institutions, and governmental organizations such as AMTRAK, and the U.S. Air Force, were all represented. I soon learned I was the only CPA in the group (interestingly enough, when I scanned the list of alumni, the only accounting firms were Andersen Consulting and Ernst & Young).
The first two hours consisted of the program overview and introductions. Our program was facilitated by Karen Gable and Jeff Soluri, two long-time Disney Cast Members with diverse backgrounds. The Institute prefers to hire from within in order to effectively pass down the Disney traditions from Cast Members who have had front-line experience. You realize how important this is when you listen to the level of questions participants ask about Disney and how it operates internally.
When Jeff and Karen asked participants what made Disney special, the stories all focused on the people aspect of Guest service. And I find this is true anytime people relate stories of extraordinary service: It’s always about the way they were treated, never about the quality of the particular product or service they purchased. This is an important facet of providing quality service. It’s not so much what people get, but how they get it that determines their feelings about your organization.
Disney uses the Customer Relationship Scale to illustrate this. Any organization can be placed along a continuum depending on how passive or interactive they behave with their customers:
Passive = Satisfaction-based
Active = Performance-based
Interactive = Commitment-based
When I think about the professional knowledge firms we work with, many of them are passive. That is, they simply satisfy the customer’s need for compliance work. They do their work and get paid, never really taking the customer relationship beyond the fulfilling of a particular need. Disney says over 75% of businesses have passive relationships with their customers, and I believe that’s true of professional knowledge firms as well.
Moving into the active phase requires a firm to solicit feedback from its customers about what they want and need. Fortunately, many firms are beginning to do this, but far too few, in my opinion. We tend, as professions, to put too much focus on what we do rather than on the customer who benefits from what we do. Fifteen to 20% of organizations are in the active phase.
That leaves approximately 5% of organizations in the interactive phase, in which the organization develops a partnership with the customer that is so deep, it can anticipate the customer’s needs and desires. This is the level that all world-class service providers strive for. It not only requires continuous feedback from the customer on how you’re doing, but also on what they want and expect. It’s a commitment so deep it is often compared to marriage—except the onus is on the service provider to exceed the customer’s expectations, not a 50-50 responsibility. When you start looking for this type of behavior, you realize that Disney has achieved the interactive level with its Guests. In fact, they claim that Guests are “paying consultants.” Isn’t that an interesting way of viewing learning from customers?
THAT’S EASY FOR YOU, YOU’RE DISNEY
Probably the most profound lesson I learned was during the opening session. After the participants told stories of why Disney was special to them and how many “moments of magic” had been created for them and their families, one participant said: “Yeah, well, that’s easy for you guys. You’re Disney, and you have all this wonderful magic to spread among your Guests. It’s easier for you to do these things.”
The instructor, Jeff, responded: “No, we’re Disney because we do these things.” Disney faces competition, government regulation, labor shortages (Orlando’s unemployment rate is a paltry 3%), union problems (Walt Disney World has over three dozen labor unions to contend with—Mickey Mouse is a Teamster!), and all of the other hassles that businesses have to deal with. The difference is Disney’s culture.
UNTIL MY NEXT POST...
I began to wonder why it is that I can wait 30 minutes to get on the Pirates of the Caribbean ride and have a good time, but if I’m in the Post Office or bank line for more than one minute, I get irritated. What’s the difference? That difference is subtle but telling. And it has to do with whom we, as professionals, really compete with. I frequently ask my colleagues this question, and get the usual answers: “Other firms, consultants, software products, etc. All of these are correct but too limiting in terms of our competition.
I would like you to think about whom your competition really is, and in my next post I will share more of the lessons from Disney’s Customer Loyalty course with you.
Ed Kless - 02/18/2007
In an effort to stem its recent decline, Dell Computer has created a website entirely dedicated to getting feedback and knowledge from its customers.
The Ideastorm site seeks customers to post their idea, promote which ideas all users find interesting, discuss the idea with others, and see what Dell plans to deliver. Professional Knowledge Firms take note, you need to set up a site like this today!
So far, one of the top suggestions for Dell — allow customer to purchase a crapware free computer, no AOL, no Google, no Quicken — just a clean install of the operating system. Some people are even willing to pay more for less! Hmmm.
What are your thoughts on both the site and the top suggestion?
Ed Kless - 02/16/2007
In a previous post entitled the Triangle of Truth; I talked about how many of the firms I coach ask me to assist with scope creep problems. In most cases it turns out not to be scope creep at all, but rather the lack of a decent scope document.
I hereby submit the following as the required elements (consultants call them inclusions) of a scope document.
- Scope statement
- Objectives
- Constraints
- Project structure
- Roles definition
- Project team definition
- Assumptions
- Deliverables
- Scope details or functional requirements
- Project change control
- Future projects list
- Approval
I will now briefly examine each of these elements.
Scope statement. The scope statement defines in one sentence what the project will accomplish. It should support either the mission statement of the customer or be tied to at least one strategic objective of the company. An example scope statement would read: To (infinitive) (something) on or before (date) and at a price of (dollar amount). Notice how this statement addresses each of the three angles of the Triangle of Truth. While this statement appears first in the document, it will usually be written last.
Objectives. Objectives answer the specific question “What does success look like?” They are high-level statements that explain exactly what the desired results of this project are. Since they are general actions, they should begin with verbs. For example: train ... , create ... , develop ... , followed by specific, measurable, attainable, relevant, and time-sensitive (SMART) items to be accomplished. A general rule of thumb is that a project should not have more than eight objectives. If you have more than eight, you probably have more than one project.
Constraints. Constraints are limitations to the successful completion of the project due to affecting the scheduling of activities. They are things that could prevent work from getting accomplished. Common constraints are found in the following areas: technical, financial, operational, geographic, time, resource, legal, political, and ethical. Note that while similar categories exist for risk, constraints are not risks. Constraints are known facts; risks are uncertain events. A constraint may evolve into or cause a risk, but at least early on in the project they are different. An example constraint might be the lack of availability of data from current systems.
Project structure. Each project must have an overall organization. In short, your project structure is the organization chart for the project. Usually, this organization is in some conflict with the normal regular structure of the company and, therefore, creates a temporary matrix-type organization. While there are some advantages to matrix organizations, the main weakness is lack of authority of the project manager since the functional manager has more say in the work performed by the individual.
Roles definition. Once you have outlined the project structure, it is important to define each role within the project. For each role you must define the specific responsibilities. These can and will change from project to project. Some roles requiring definition are:
- Steering committee member or executive sponsor
- Project manager
- Project owner
- Team leader
- Team member
- Project advisor
Team definition. This is simply the list of people who are functioning in what role on the project. Once you have the structure and role defined you need to assign people to the roles. In large projects this is part of resource planning.
Assumptions. Assumptions are beliefs about the relationship that serve as the starting point for project definition. Be sure to evaluate each assumption in terms of it being true, real, and certain. Another way of looking at them is that they answer the question “what should we not leave unsaid?” Do not have too many assumptions. If you do you probably need to refine your scope — having more than ten assumptions looks careless. One example of an assumption relates back to the Triangle — In order for success to be attained the relationship between scope, costs and time must be maintained. A change to any one of these three interrelated variables will affect the other two. For example, adding to the scope of the project will require an adjustment to either the cost of the project or the commencement date.
Deliverables. Deliverables are the tangible results — the products or services of the project. If objectives are verbs, as we stated earlier, deliverables are the nouns. They are usually things you can physically touch. There are two types of deliverables: intermediary, meaning they are to be used in subsequent tasks on the project and final deliverables, meaning they are turned over to the customer at the end of the project. Examples of deliverables include: the project plan, a training schedule, and training manuals.
Scope details or functional requirements. These will change depending on the project, but this is a critical section which expounds on the scope statement’s infinitive. Think of this section as the detailed definition of that infinitive.
Project change control. I will consider project change requests in a future post. Suffice it to say that this section is like Article V of the United States’ Constitution which describes how amendments are to be made. This section simply says that the scope document can be changed (amended) and defines the process for doing so.
Future project list. In addition to the obvious of being a list of possible future projects and major tasks that will be deferred until after this one is complete, the future projects list is important in that it defines what is not included in this project. It is important to list these additional projects as they are identified during the planning process, since they are the future business of a professional knowledge firm.
Approval. The scope should be signed and dated by the project manager and the project sponsor.
If you do not have each of these elements, it is my belief that you do not have scope. If you do not have scope, you cannot have scope creep.
Ron Baker - 02/15/2007
I have written about the Trailblazer advertising agency Anomaly in the past. It is one of the few advertising agencies in the world that does not price by the hour, nor does it keep timesheets.
They are incredibly innovative, and service flagship customers, from Coke to Virgin America. Carl Johnson, one of the co-founders of Anomaly, wanted the agency to be different, so he dumped timesheets and looked for more creative ways to be compensated. From creating their own intellectual property, to taking an equity stake in its customer’s business, Anomaly has left hourly billing far behind.
Unlike hourly billing, Anomaly aligns its interest with that of the customer, in both word and deed. It puts its money where its mouth is, which most agencies are reluctant to do, especially under hourly billing. Aliph CEO Hosain Rahman explains the logic of this type of creative compensation:
You can pay millions to big agencies and get total crap. Agencies have no incentive to produce amazing results, so they’ll extend the project as long as possible because it’s all billable hours. But Anomaly has an incentive to do great work. They have the same skin in the game that we do.
Tom Carroll, TBWA President, had this to say with respect to how far in front Anomaly is in the industry:
Everyone talks about change, but no one comes close to what Anomaly is doing. If he’s right, then everyone will move toward it.”
I think Anomaly is right, and we wish them continued success. It has proved several hypotheses: You can run an ad agency without pricing by the hour; without using timesheets; owning your own intellectual property; and creating customized compensation agreements based upon the subjective theory of value.
Anomaly’s success, like so many other Professional Knowledge Firms that have eliminated timesheets, prove something else. They prove that the best pricers in the professions are those without timesheets, and I believe this is a causal relationship. Getting rid of timesheets is not the end, it’s the means to becoming better pricers. Not having timesheets forces firms to think about results and value, not inputs and costs.
The only question is: When will the rest of the industry figure out that what Anomaly is doing is the right thing to do, not only for themselves, but the customers they are privileged to serve?
Read Business 2.0 article, ”Madison Avenue’s do-it-all startup,” from the January/February 2007 edition.
Michelle Golden - 02/14/2007
The last few months have been very active for this VeraSage Fellow. I’ve had the pleasure of visiting some fellow Fellows around the globe.
In late November, I met New Zealand Senior Fellows Peter Byers and Yan Zhu in Southern Australia when they kindly hosted my husband and I on a sight-seeing adventure. We’re pictured together at the Twelve Apostles, both on the ground and in a chopper from which observed nature’s brilliant work from an unforgettable perspective.
In January, Daryl Golemb of San Diego, CA hosted Ron Baker and me for a fabulous dinner (and plenty o’ wine) at his place in Lake Tahoe. (I sure wish I’d had my camera!)
And about a week ago, Paul O’Byrne and Paul Kennedy hosted me at their delightfully bright and comfy offices in Goffs Oak, England. And Paul O’Byrne took me on a fabulous tour of London and suburbs. Who else would have taken me to a real English pub and to the birthplace of Posh Spice?
Most interestingly, as Paul toured me around, I couldn’t help but notice the large number of CLOCKS in Britain. They are EVERYwhere! I had to ask Paul, “so, is England also the ‘birthplace’ of professionals’ obsession with tracking time?”.
Ron Baker - 02/08/2007
I often think that the real message of what we do at VeraSage gets lost in the mechanics of our theories. We spend so much time explaining the Firm of the Future’s New Practice Equation and what a tectonic shift it is for all Professional Knowledge Firms, that sometimes it must seems as if all we are interested in is profitability.
Nothing could be further from the truth. VeraSage exists to better the professions, and is really about a better quality of life for professionals. Sometimes I think this principle gets drowned out, given how inundated we are with “how to” questions.
Chris Marston has an excellent post that reminds us all why we do what we do. It is about changing lives, and firms, one at a time. It’s about creating tomorrow and not holding on to yesterday. It is about courage and vision, not last year’s P&L.
PKFs are eating their young, old, and everyone in between with their antiquated Firm of the Past paradigm. Chris reminds of the true Purpose of our Quest, and I hope you all read his insightful and inspiring post.
Changing Lives...One by One..Until We’re All Done!
Be sure to read the comments as well, especially the one by “Anonymous,” which is truly amazing and right on.
Webmaster - 02/07/2007
On April 27 and September 14, Ron Baker spoke to the graduate network of Atticus in a teleseminar on Value Pricing for Lawyers.
Part 3 (Q&A) took place on January 25. Download Part 3 of the seminar here.
Please note that these files are approximately 10MB each so it may take a minute to download.
Brendon Harrex - 02/05/2007
It has been estimated that we can spend between 10% and 20% of our day looking for things we have lost. This may be a misplaced workpaper, a lost file, an email you thought you had kept in a safe place, or an idea that you had that you can’t quite recall.
As well as requiring effective filing systems to capture workpapers etc, you need to develop an effective system to capture your ideas.
The chances of you not losing information are significantly increased if you deal with it immediately.
For example:
- Don’t think of the phone call as finished until you have completed the file note.
- Don’t think of the client meeting as completed until you have debriefed with the client service team.
- Save your emails in a folder where you know you will be able to find them again.
- If you read something useful, file it, photocopy it, or take notes on it and store them in a logical place where you can find them again.
If there is 10-20% of your day available, I believe you might as well have it.
Have a great week.
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