Community Section -
Webmaster - 03/29/2007
By Guest Blogger, Brenda Richter, CPA
Earlier this week, an accountant from Texas sent a letter to Dear Abby suggesting ways that clients can “help out” during tax time. I couldn’t disagree with this accountant more.
Here’s my response:
ANOTHER ACCOUNTANT COUNTS THE WAYS
By: Brenda Richter, CPA and A Member of the Principa Alliance
Dear Abby,
As a CPA, I was horrified when I read the letter from Sleepless in Texas (03/26/07), the accountant who listed ways to help out during tax time.
I encourage your readers who recognize their CPA in that letter to change CPAs at once. There are plenty of CPAs who enjoy their work, enjoy their customers and organize their accounting business so that they are well rested and alert to provide the best service.
I propose the following ways to help out during tax time:
1) Do feel free to drop by anytime. You are always welcome in our office. We hope you feel it is a place where you can get things done, solve your problems and gain peace of mind. If your primary CPA is not available, you can meet with one of our other highly qualified Team members.
2) Tell us about your children, family, business, hobbies, etc. The more we know about you the better we can serve you and provide you with appropriate advice and solutions. Arrange to come in more than once a year. The most valuable service we offer is proactive planning.
3) Be honest with us up front regarding your budget for professional services. That way, we can design a fixed price agreement to suit your needs before work starts.
4) Encourage your family, friends and colleagues to call us if they need help. Referrals are the best way you can thank us for a job well done.
5) If you have a question regarding the financial consequences of a decision you are trying to make, call us. After all, your fixed price agreement includes an annual consulting agreement to discuss such matters. Of course, if your questions require additional research and analysis, we will issue a change order and provide you with up front pricing for the additional work.
Sincerely,
Well Rested in California
Read the original letter from Sleepless in Texas.
Michelle Golden - 03/28/2007
Think they’re not related? Think again.
Allison Shields has an excellent post on her LegalEase blog called ”Why Do Lawyers Leave the Law?” She describes a departed lawyer’s frustrations as described in a article in New York Lawyer:
“I felt that something I’m really good at is turnaround time, and I did not feel there was any reward for that,” she says. “The reward was more work. I didn’t see how I could ever get to the point where I was so good at my job that I could manage it all. The point was the hours.”
This is exactly the scenario Ron Baker describes as human cattle and not human capital. How can someone feel good about his or her professional career when one’s day is more like a production line? Allison goes on to describe:
Under a billable hour system, this is exactly what happens: rather than being rewarded for being efficient (or, even better, effective) - which is what the client would most often prefer - many lawyers in a billable hour system are penalized for exactly the kind of work that clients want. Lawyers need to make their hours, so their alternatives are to either work slowly, inefficiently, and ineffectively, or to ‘pad’ their hours - unless they want to be passed over for advancement or compensation increases.
See her blog post for more excellent insights as well as a link to the original article. As an aside, several VeraSagers (Ron Baker, Paul Kennedy, Tim McKey and I) had the pleasure of meeting Allison in Kansas City in November. She’s a great thinker and adds tremendously to the professions of consulting and law.
Ron Baker - 03/28/2007
On November 14, 2006, I conducted a Web cast for the AICPA titled: Pricing on Purpose—Implementing Value Pricing in Your Firm. It’s approximately 1 hour and 37 minutes long, and if you click here, Windows Media Player should pop up with the presentation, which includes a Powerpoint slide show and audio.
Thank you to Mark Koziel of the AICPA for making this presentation available.
Ron Baker - 03/27/2007
VeraSage Senior Fellow Peter Byers has one of the most innovative sole proprietorships in the world, bar none. I had the great good fortune of meeting Peter in Auckland, New Zealand in the year 2000; ever since I’ve watched—like a bystander—his progress with amazement. You can read more about Peter at the VeraSage Web site in New Zealand.
Not only did he adopt Fixed Price Agreements with alacrity immediately (before we even met), but he’s also received nearly $1 million (NZ) in TIPs. Peter’s firm is located in Northern New Zealand, in a town with a population of roughly 5,000. The majority of his customers are farmers.
On March 21, 2007, I received this E-mail from Peter explaining the progress he has made utilizing Fixed Price Agreements:
Hi Ron,
I’m having a bit of a golden run with my roll over [FPAs] for the next financial year. In every case so far we’re up between 15%-20% on last year’s price—often the client opens the subject and we review the year that was, what’s around the corner, next year and work to done and by what time line, agree the price and get on with business.
It is a wonderful way to conduct business and as the clients have absolutely accepted the “no surprises” and all the other matters contained within Value Pricing and Total Quality Service we’ll top $2 million this year but the real juice is that all of us are enjoying the work and the depth of the relationship that VP brings. Karen especially, as she can produce the monthly accounts in about 15 minutes—” Fee as agreed"—that’s it.
Couple of matters—some accountants and lawyers are using the words “Service Agreement” where clients do not like the word “Fixed” in the FPA—probably because they have not explained the Change Order properly—but the test is that it is working. As for COs, I’m seldom using them now—what clients prefer is to rewrite the agreement or if that doesn’t occur then we run two prices—one for the initial FPA and then a separate agreement for the “new work”; so we can have two concurrent payments, one for the 12 month agreement and one for the 2/3 month special work—just a variation of a theme but it does avoid the word “change” in CO.
I think you are a genius.
Peter
As you can see, Peter is constantly experimenting with the presentation of FPAs and Change Orders, figuring out better ways to communicate value to the customer.
The real genius here is Peter. I’m just a lazy theorist, while Peter has actually implemented these ideas, not to mention improved upon them. He is one of the most sought after mentors to professional knowledge firms in New Zealand and Australia, and he’s not cheap. Now you know why.
The Kiwis are some of the most impressive and progressive firms in the world. We often have asked ourselves why this is? Anyone have any thoughts?
Ron Baker - 03/27/2007
Michelle Golden has written about the Gruntled Employees Blog before. Jay Shepard, partner of the Shepard Law Group is an enormous advocate of value pricing, as you can see from his firm’s Web site.
Congratulations Jay on being one of the few leaders with the vision to change the archaic way lawyers price their intellectual capital. We at VeraSage salute your entire firm!
Michelle Golden - 03/27/2007
Dan Morris. Dan, our colleague, is a trailblazer and a founder of VeraSage Institute. He’s also a really good teacher. (See his upcoming gigs here.)
Tom Hood, Exec Dir and CEO of Maryland Society of CPAs, just blogged about his experience watching Eric Clapton perform and then learning from Dan Morris about leadership. Specifically, about sharing the limelight with up and comers in your field or in your firm.
Great post. Check it out. (did you know the Maryland Society has a blog? Cool, huh?) And, Dan, d’ya play Layla?
Ed Kless - 03/22/2007
You’re just nice,
You’re not good,
You’re not bad,
You’re just nice.
I’m not good,
I’m not nice,
I’m just right.
This lyric is from Stephen Sondheim musical, Into the Woods. They are sung by the character of the witch near the end of the play. She is extolling the other characters for not being willing to sacrifice one of them for the sake of the others. In her mind, the lives of the many outweigh the life of the one.
These words come rolling back to me whenever I teach one particular section of a class we call the Sage Consulting Academy. The topic is authenticity in consulting and the concept described by Peter Block in his book, Flawless Consulting, defines authenticity as “putting into words what you are experiencing.”
Authenticity is quite different from honesty. Block believes, as do I, that authenticity is the prime directive of consultants.
Let me give an example:
You show up at initial meeting of a new project. The project’s economic buyer has delegated the work to a subordinate. During the meeting this person says, “This project should not take long. A few weeks and you will be done. I don’t have much time to spend on it, but my assistant can give you some help. Don’t take too much time from my people; they have a ton of work to do already.”
You feel completely unimportant because you have been trivialized. This is what you do for a living, but to them you are an interruption.
The non-authentic response would be to say, “This project has far reaching implications. Your boss wants this done, you know.” Notice that this is a true statement. It is certainly honest, but it is not authentic.
Block says the authentic consultant response is to put your emotions into words in an unemotional way. In short, take what you are feeling and turn it into a statement of fact. So an example of the authentic response would be, “You are treating this project as unimportant and trivial. If this is an interruption, we should reassess the timing. If not, I would like you to treat it with more importance.”
Notice the first part of the statement expresses the feelings you have as a fact.
When I share this concept it always stirs up a ton of controversy. “I can’t do that!” Most say, “It is not nice.”
Being a professional is not about being liked, it is not about being nice. It is about doing what is right for the customer. Allowing someone to trivialize your work, while insulting to you, is also not right for the customer. In this case, the economic buyer is the customer.
It is not nice, it is just right.
If anyone has any thoughts on this I welcome comments and questions.
Ron Baker - 03/20/2007
Pat Lamb has an interesting post on his Blog from March 9, 2007, In Search of Perfect Client Service: Flash Announcement: The Billable Hour Is Dead. It quotes from a speaker at a legal conference:
At the Law Firm Leaders Conference in San Francisco, Dan DiPietro of Citibank declared “the billable hour is dead.” He went on to say that “I really believe the business model is tired and old and not working for a lot of firms.”
What’s interesting about this post are the comments that follow, especially the ones from Dan Hull and Moe Levine. I urge you to read them carefully so you can understand my comments and why I so vehemently disagree with both of them.
Here is the comment I posted on Pat’s blog:
Dan DiPietro is right, the billable hour is dead, it’s just that law firms don’t know it yet. Name for me any other business that prices by the hour? Even plumbers are enlightened enough to give you a fixed price these days.
Dan Hull: Clients don’t get to pick your pricing strategy, you do. That’s the seller’s, not the buyer’s decision. I didn’t ask the airlines, hotels, rental car companies, software developers, or retail stores to change to Yield Management. Yet, most of them have. Historically, pricing changes ALWAYS come from the seller, never the buyer. Even law firms changed to hourly billing from fixed pricing (in the 1940s), not at the client’s request, but on their own.
Gerry: The autopsy reports can be found in the millions of words I’ve written on this topic. But, unfortunately, you are correct, in the legal world, the billable hour is alive and kicking.
Moe: I’ve read every book by Peter Drucker and Gary Hamel. Of course the client is the ultimate arbiter of value, but that’s not the point. The point is the pricing strategy the seller uses to capture the value created. Clients do not like the billable hour, and the evidence is all around. If it’s such a good pricing strategy, why don’t hotels, airlines, cruise ships and other services providers use it?
Customers want to know the price up-front, before they buy, not after. The billable hour places the risk on the client, and I defy you to find a customer who enjoys additional risk.
I’ve also read Coase theory of the firm, and it’s simply not relevant to this discussion. It discusses why firms exist, lower transactions costs, etc. It does not mention pricing strategy.
This isn’t about “cheaper” services, it’s about establishing a price commensurate with the value to the client, not efforts, costs and profit wishes of the seller. I suggest instead of Coase you study the labor vs. subjective theories of value, especially the Marginalist Revolution of 1871.
What makes us think clients always want the cheapest price? This would be the dagger in the heart of first-class airfare, AMEX’s Black Card, Starbucks coffee, bottled water, and a myriad of other services to numerous to mention. No doubt, low price legal options should be available (we don’t need constitutional scholars closing real estate transactions). But a healthy market, and a sign of sophisticated pricing, are industries with a full range of price points to cover everyone’s tastes, ability, and willingness to pay.
Moe: I challenge you to find me ONE example of a situation wher the buyer changed the pricing strategy of the seller. Wal-Mart doesn’t count, since they just beat the hell out of their suppliers, but even they don’t dictate the seller’s pricing strategies. Also, not all businesses are as concerned with price as Wal-Mart. Every been to Nordstrom? Disney? Drive a Lexus? Ever hear of concierge medicine? We’re a rich country, we spend a small fraction of our GDP on necessities, the rest is spent on luxuries.
Also, Drucker was an enormous fan of price-led costing, which has been used by Toyota since day one. In fact, they are so good at it, they don’t use a standard cost accounting system. You can read about this in Profit Beyond Measure, by H. Thomas Johnson, the man who started the Activity Based Costing movement.
The silver bullet is fixed pricing, given to clients in advance, like every business on the planet. My mechanic does it. My contractor does it. My earthquake insurance provider does it and they deal with more risk and uncertainties than lawyers can even dream of). If these other businesses can do it, why can’t lawyers? I believe the first firms who do it will have an enormous competitive advantage.
Moe, your discussion of a guarantee of hourly billing’s savings versus another pricing strategy is senseless. Buyers purchase prospectively, not retroactively. An apple today is a different value than an apple tomorrow, and an airline seat purchased six months in advance is different than one purchased 10 minutes before departure. Clients won’t compare a fixed price to an hourly price since they don’t really care how many hours it takes to do something. Do you care how many hours it took Porsche to build your car? Do you even ask?
We haven’t even begun to discuss the ethics of hourly billing, and the plethora of problems it has caused for the profession. Use Immanuel Kant’s categorical imperative and ask yourself this question: If hourly billing is so great, would you want every single business to universally use it? To ask the question is to answer it.
I agree with you about the interests of buyers and sellers being at odds, which is why fixed prices are a better deal for the buyer. As one attorney explained to me, “I’d never buy the way I sell.”
How said is that?
By the way, the “sound and fury” from my think tank is not to sell consulting services. It is to enlighten professional knowledge firms that cost-plus pricing is a sub-optimal pricing strategy in an intellectual capital economy. We’ve watched (like Drucker, being a Bystander), thousands of firms move away from hourly billing, all for nothing more than the pleasure of seeing them succeed.
Of course, after I wrote this and slept on it, I want to say so much more. I’ll hold back for now, and just add one more point. The seller, not the buyer, is responsible for their pricing strategy. They can change it at will, and do all the time (as when airlines, after deregulation, moved to a Yield Management strategy rather than a breakeven strategy).
This is why organizations such as the Professional Pricing Society exist, to offer intellectual capital to sellers to turn pricing into a core competency. If sellers were simply beholden to their buyers regarding pricing strategies, there would be no need for this organization, or any other relating to pricing skills. We could simply let the buyers set prices at their whim.
As my colleague Michelle Golden wrote to me about this post, “a painful conversation,” and I couldn’t agree more. It’s painful because there is overwhelming evidence that it is the billable hour that is the anomaly here, not value pricing.
When will lawyers wake up and bury the billable hour? It’s up to them, not their customers.
Ed Kless - 03/19/2007
David Maister posted an entry on his blog on How to Set Fees.
What followed were some great comments by many people including me. Please feel free to add your own thoughts at his site or here below.
Ron Baker - 03/16/2007
One way to separate your firm’s offering from the competition is to offer two offerings side-by-side, taking advantage of the so-called isolation effect, as Norma’s restaurant in the Le Parker Meridien Hotel on West 57th Street in New York did when it began offering a $1,000 omelet on May 5th, 2004.
Billed on the menu as the Zillion Dollar Frittata—containing six eggs, a lobster, and approximately 285 grams of sevruga caviar—it has this message next to the entry: “Norma dares you to expense this” (displaying an understanding of Category III spending—that is, spending someone else’s money on yourself, which usually means the customer is less price sensitive).
They also offer a “budget” version of the omelet, which sells for $100, a bit more palpable when shown after the $1,000 offering, and an effective marketing strategy. Stanley Marcus—son of one of the founders of Neiman-Marcus and creator of the store’s famous Christmas Catalog with his and her gifts—always insisted on offering $100 Christmas Gifts in the store, with the logic being that a bit of the magic of the Christmas Catalog gifts, which were usually in the tens or hundreds of thousands, would rub off on the lesser priced offerings.
Joining the $1,000 omelet, the $100 hamburger, is the $1,000 pizza offered by Manhattan restauranteur Nino Selimaj. Using the isolation effect, he also offers slices for $250.
Does your firm have a $1,000 pizza? Why not?
Ron Baker - 03/07/2007
I’m here in Sydney, Australia, overlooking Darling Harbour, having just finished the annual Principa Conference with Ric and Kerry Payne. I spent a lot of time discussing the TIP Clause, and sharing stories with the group how to structure, negotiate and secure TIPS. This is a very effective pricing strategy when you are at the top of the Value Curve, where you know the value created will be much more than you could ever lie on a timesheet.
When I finally checked E-mail, I had the following question from a reader come in under “Ask VeraSage?” It’s the type of question I have received countless times before, each time being very depressing. It illustrates just how dysfunctional our pricing strategies are in the professional knowledge firm world, and how much we have to learn about customer psychology, behavior, leverage, economics, and other practices of sound pricing.
As you read the following question and answer, keep in mind the following profound wisdom from Yogi Berra. In his inimitable way, Yogi Berra explains this problem eloquently in his book When You Come to a Fork in the Road, Take It!:
When we played the Pittsburgh Pirates in the 1960 World Series, it was hard to believe we lost. It was real strange. We crushed their pitching. We won three of the games, 16-3, 10-0, and 12-0. We were the more experienced and stronger team. But we lost in a wild and weird Game 7 when Bill Mazeroski hit that homer in the ninth inning over my head in left field. To this day, I thought the ball was going to hit the fence. Anyway, when a reporter asked me later how we could lose to the Pirates, I said, “We made too many wrong mistakes.”
In baseball, like everything, mistakes are physical or mental. In tennis, they say “forced and unforced errors.” I like to say there’s mistakes—and there’s wrong mistakes. What I mean is that wrong mistakes are more serious, more avoidable, more costly. They’re usually more mental than physical. There’s nothing to be learned from a second kick of a mule.
That last sentence is also profound. When will PKFs wake up to the dysfunctionality of hourly billing? How many times do they have to make the same mistake?
Here’s the E-mail question I received on March 6, 2007:
I need a second opinion. I am a trusts and estates attorney / mediator and a former trust officer all in New York City. I am now solo. My biggest family client had a cash flow dilemma/house purchase need that I solved with a very innovative plan in three days. The plan provides the adult child over $2MM of capital with zero out of pocket cost to him. It also protects the family lender and the family trusts.
HOW do I value bill him for this? I already presented the solution after vetting it with the various bankers and accountants. The family is ecstatic.
I did not propose a price in advance because (a) it was a three day rush and (b) I did not know how overwhelmingly successful my plan would be until it came together.
I need a price and language to use with the family to get that price.
Many thanks in advance.
Here’s my reply:
Thank you for your question. I only wish I had good news for you, and a nickel for every time we get a similar question from professionals regarding a missed pricing opportunity. They are among the most depressing e-mails we receive, since they illustrate how endemic poor pricing practices are within professional knowledge firms.
The cardinal rule for all Value Pricing is to price the engagement BEFORE you do the work. A service needed is ALWAYS worth more than a service delivered. We only have pricing leverage before the transaction, not after, since value cannot be retroactively managed. The customer is least price sensitive before a transaction, and measurably more so afterwards.
In this instance, I would have recommended you negotiate a TIP Clause with the customer (sometimes referred to as a success price, or retrospective price), up-front, before you began the work, and certainly before you discovered the solution. The fact the job was a three day rush is not the issue. If I take my car to a mechanic in an emergency, he’ll fix it, but he’ll give me a price up-front; same with Kinko’s doing a rush job, or an airline making capacity for me at the last minute to get on a flight (by bribing another passenger off the plane, for example).
When you believe you might obtain a great outcome, and you work is poised on the top of the Value Curve, a TIP is an appropriate method to capture some of that additional value created. But you can only effectively receive a TIP if it was part of the discussion with the customer BEFORE you performed the work. Afterwords, they are likely to simply ask: “How many hours did you spend?” And if you have a signed representation agreement that mentions your billing rate, you’re stuck with your billable hour. If your agreement doesn’t mention price at all, you may have more leeway, but it’s still going to be based on precedent.
This is not to say we haven’t seen professionals receive a TIP after the fact who didn’t discuss it up-front, but it’s a minority of cases, and usually depends on the nature, generosity, and length of the customer relationship, less so than the value of the result.
You could try the following: “Mr. customer, as you know, we were able to develop a strategy that provided the following benefits...[state the value of everything you did, including reduction of long-term risk], in record time. Our normal price for this would be $XX,XXX [state the price you believe it was worth]. We are willing to let you pay what you think it was worth. Does that sound reasonable?”
There are, of course, other ways to phrase this, but I think you get the point. It all depends on the generosity of your customer, and if they are use to paying by the hour, or a fixed price for everything you do, then you’re going to be stuck with that amount. Chalk up the difference between the value you created and what you eventually get paid to what we at VeraSage call the ultimate accounting equation:
Debit: Experience
Credit: Cash
But don’t be discouraged. When confronted with this situation again, talk price before hand. You could, for example, quote a fixed price to start the project and include the TIP clause language below in order to capture more value for an extraordinary result. The important strategy is, this must be discussed when you have the leverage (not the customer), which is before the work is performed, not after.
Tip Clause: In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of [customer], some additional payment to [professional knowledge firm, PKF] is appropriate in view of your overall satisfaction with the services rendered by [PKF] and/or the financial results achieved by [customer] for this transaction/project.
Good luck with this, and please let us know what happens. I wish I had the magic bullet for you, but it’s simply not possible to capture the value created unless and until PKF begin to Price on Purpose, like every other business on the planet.
Sincerely,
Ron Baker, Founder
VeraSage Institute
RSS Feed
Comments | 0 Trackbacks | Permalink | Choose an Industry: Other