Community Section -
Ron Baker - 04/29/2007
“You can dream, create, design, and build the most wonderful place in the world but it requires people to make the dream a reality”—Walt Disney
Note: We left off in Part I at the end of the opening session of The Disney Approach to Customer Loyalty: Creating Service that Keeps Your Customers Coming Back, a professional development program offered at the Disney Institute.
PROFIT IS A RESULT
Every business owner should have to repeat this saying at least 50 times daily: Profit is a result of customer behavior (in fact, it’s really a lagging indicator of customer behavior). After all of the research that exists on loyalty economics and the value of customer retention, the average company in America today loses between ten and thirty percent of its customers annually. The consulting firm Bain & Company has proven that a 5% change in the rate of retention can swing profits anywhere from 25-100%.
Service firms rely on existing customers for 85-95% of their revenue. The AICPA reports that it costs 11 times as much to bring in a new customer as it does to keep an old one. Imagine being able to increase your marketing and advertising effectiveness by a factor of 11. With all of this empirical evidence, why do so many businesses still insist on focusing on customer acquisition rather than retention?
Walt Disney understood the value of customer retention long before most business people forgot it. When an elaborate Christmas parade was being planned for Disneyland, at a cost of $350,000, the Park Operating Committee spoke against it. They argued that it was money wasted since the holiday crowds would come to Disneyland with or without the parade. Walt replied: “We can’t be satisfied, even though we’ll get the crowds at Christmastime. We’ve always got to give ‘em a little more. It’ll be worth the investment. If they ever stop coming, it’ll cost 10 times that much to get ‘em back.” Walt got the economics right.
CUSTOMER SATISFACTION VS. LOYALTY
It would seem that satisfaction and loyalty go hand-in-hand. But they don’t. Merely satisfying customers is no longer enough. We have to exceed their expectations, and move them into the Zone of Affection, which is where we earn their loyalty. Measuring customer satisfaction through such tools as surveys, questionnaires, telephone interviews, etc., is not enough. You can score high numbers on these surveys, and the customer may still defect to a competitor.
Customer satisfaction measures today. Customer loyalty and retention measure the future. Economists refer to this a revealed preference: Watch what people do, not what they say. The ultimate judge of customer loyalty is repeat purchases over their lifetime, not high scores on satisfaction surveys.
During his many visits to Disneyland, Walt would always be on the look out for “plussing” opportunities—that is, ways to provide more pleasure for the Guests. At Walt Disney World today, they have a “Take 5” program. Each Cast Member is encouraged to take five minutes out of their day and make something special happen for a Guest. This could be something as simple as offering to take a picture for a family (so everyone gets in the shot), to giving away stuffed animals to a sick child confined to her hotel room.
Disney refers to these encounters as Moments of Magic and attributes their phenomenal retention rates to creating as many of these moments as they can. When you consider that Walt Disney World has 43,000 Cast Members on its property, five minutes per Cast Member, per day, is bound to create many Moments of Magic for its Guests. By emphasizing the Moment of Truth—any encounter a customer has with an organization and develops an impression of its service—an organization changes its internal focus from the activity to the outcome of the customer encounter. Many businesses have entirely reengineered their processes and procedures in order to turn these moments of truth into opportunities to wow their customers.
THE DISNEY-MGM STUDIOS FIELD EXPERIENCE
In the morning, we boarded buses to the Disney-MGM Studios theme park. The marquee on the bus was flashing: Customer Loyalty: Keeping the Promise. After viewing Jim Henson’s Muppet Vision 3D show, we were instructed to visit an area of the park and observe first hand Disney elements of earning customer loyalty.
Of course, my idea was to run over to “The Twilight Zone Tower of Terror” to ride this new $127 million attraction. Luckily, I found two like-minded souls who were brave enough to agree with my idea. The entire “theme” around this ride is a hotel stay. The Cast Member who boards you into the basement elevator asks, “How many in your party, sir?” Excellent entertainment, especially if you’re a big Twilight Zone fan.
This made me think about the Value Proposition, which every business offers to its customers. It has three components: quality, service, and price. If you study these three components, it becomes clear that it’s no longer possible to compete on quality, especially for CPAs. Quality is a table stake-the minimum you need to be in the game. Who would stay with an incompetent CPA? Quality does not provide a competitive differentiation.
And price is no good as a competitive differentiation either. After all, someone will always be willing to do what you do for less money. There’s nothing exciting about competing on price, unless you enjoy price wars.
That leaves service. Since a competitor can match my quality and beat my price, service is where I can win—and win big. Your competition can’t even observe your service and relationship skills with your customers, making it difficult for them to persuade customers to join them. What’s more, if you offer Total Quality Service you will command higher prices, as customers almost always willingly pay a premium for good service.
Disney is proof of the value of Total Quality Service (or what they call Disney Quality Service-DQS). I’m a card-carrying member of ACE-American Coaster Enthusiasts. This means I will go to the ends of the earth to ride the fastest, tallest, most looping coasters anywhere. For me personally, “The Twilight Zone Tower of Terror” is, quite frankly, feckless. In my home state, Six Flags Magic Mountain—one of Disney’s competitors—recently opened Superman the Escape. Now this is a tower of terror. You accelerate to 100 mph in seven seconds, racing up to the top of a 41-story (yes, that’s 410 feet!) tower, and then freefall backwards at the same record-breaking speed. Technologically, it’s the most advanced ride ever built. Six Flags, at least in the area of coasters, has Disney beat in terms of quality.
But you know, Six Flags just doesn’t have the service culture of Disney—the “Pixie Dust” that makes the place special and happy. So even though Disney’s admission prices are 20-40% higher than Six Flags (try to get a discount or 2-for- 1 coupon to any Disney theme park), because they offer DQS, they have a higher customer retention rate, and thus are more profitable than Six Flags. Disney’s parks are cleaner, its Cast Members more friendly and helpful, and if I had to be restricted to one park, I’d always select Disney over any Six Flags. That’s the power of using service—rather than price or quality—as a competitive differentiation. The same principal applies to CPA firms.
MAKING THE PROMISE
How does Disney create this superior value for its guests? They have a foundation that is composed of three components: core competencies, core offering, and core customers. Your firm’s core competency is a bundle of skills, knowledge, and technologies and is a unique source of competitive advantage. Certainly one of Disney’s core competencies is Imagineering—Disney parlance for combining imagination and engineering to create its many attractions and movies. Others include: effectiveness at moving people, marketing expertise, training front-line Cast Members, leadership, and creating brand identity. What are your firm’s core competencies?
Disney has a specific core offering, passed down from the days of Walt. After noticing one of his railroad conductors treating Guests curtly, Walt said: “Try to cheer him up. If you can’t, then he shouldn’t be working here. We’re selling happiness.” Here is the Walt Disney World Resort promise to its Guests: “We create happiness by providing the finest in entertainment to people of all ages, everywhere.”
Imagine what would have happened to Disney if they had defined their core offering as animation prior to Disneyland opening in 1955. Their fate may have been similar to the railroads, who thought they were in the train business and then got beat up by alternative forms of transportation. By defining its core offering as creating happiness, Disney was able to get into television, the theme park business, merchandise, resorts, vacation clubs, and now even its own cruise line. What is your firm’s core offering?
That leaves core customers, which Disney classifies into two categories: high-fit customers and low-fit customers. In my experience, CPAs spend far too much time with low-fit customers, either existing or as prospects. We are so happy with getting more business, we lose sight of getting better business. One of the lessons from this course was Disney’s concerted effort at lifecycle marketing—that is, adding new products and services to meet, and even anticipate, core customers’ evolving needs.
Rather than focus on market share, this is a focus on customer share. For CPAs, this means attaining 100% of your customer’s budget for accounting, tax, and consulting services. It changes the focus from selling one service to as many customers as possible, to selling many services to one customer. It’s about taking care of the customer’s entire needs and anticipating them over the course of a lifetime—from a college fund to estate planning. What is the lifetime value of your best customer?
WHO IS YOUR COMPETITION?
At the end of Part I of this series, I asked you to ponder why I can wait 30 minutes in line to get onto the Pirates of the Caribbean ride and have a good time, but if I have to spend more than one minute in line at the Post Office I become irritated. What’s the difference? It has to do with who we compete with. Yes, we compete with other CPAs (the Big 4 or regional firms, etc.), H&R Block, consultants, and software products. But that is far too omitted a view of our competition in terms of our customer’s expectations.
I contend that we compete with Disney, FedEx, L.L. Bean, Marriott, Lexus, and other world-class service providers. Why? Because we compete with any organization that has the ability to raise customer expectations. Why is it that when I check my luggage with an airline, I have great trepidation that it will show up in the same place I do. Yet, I’ll drop a valuable package into a FedEx box in a remote location, confident that it will arrive at my selected destination the next day. Both organizations fly airplanes, so what’s the difference? I now demand my airline be as effective as FedEx.
Ask yourself how many of your customers patronize Disney or FedEx or are used to technology becoming faster, cheaper, and more reliable? All of these combined forces dramatically raise a customer’s expectations for any organization they come into contact with. After experiencing the level of DQS in Orlando for one week, I am far less tolerant of lousy service in a restaurant, from my dry cleaners, or credit card company. Once we experience outrageous service, we want more.
If CPAs don’t raise the bar in terms of customer service, these other organizations will do it for us, and we’ll lose the opportunity to shape and manage our customer’s expectations. When CPAs comment to me that it’s risky to give customers outrageous service because then they’ll come to expect it—and be much harder on us if we ever fall short in the future—my response is: If you don’t do it, Nordstrom already is. Better for us if we take charge of the customer’s expectations rather than leave it up to Disney.
In Part III I will give you some final thoughts from the Disney Institute’s Customer Loyalty course.
Note: For more information on the Professional Development Programs offered by the Disney Institute visit their Web site.
Ron Baker - 04/29/2007
I was recently interviewed by Kate Burgess of BRW, an Australian business magazine. She was working on a story regarding the billable hour and timesheets in accounting firms.
I told her the philosophy of Value Pricing, contrasting the labor theory of value with the subjective theory of value. I also told her what the 400 or so firms are using instead of timesheets—namely, Fixed Price Agreements, Change Orders, KPIs, and good project management skills.
In the April 19-25, 2007 issue, the article was published titled “The value of an hour: Timesheets may seem old-fashioned and a burden on employers and employees, but they can also add value.”
It starts by introducing Barry Lindback, principal in Lindback Partners, who had eliminated timesheets 10 “glorious” years ago. But Barry couldn’t reconcile his “staff costs against the amounts he was billing clients.” What did he do? He brought back timesheets. He estimated he could have charged up to $220,000 more in the financial year, or 30% of his revenue.
Here is how Barry explained his decision:
I had been doing value pricing for a number of years without timesheets. I didn’t know my work-in-progress balance because I had no way of accounting for it. You have no way of knowing whether you’re inefficient or not.
The article proceeds to quote Ric Payne, and then myself on the benefits of Value Pricing and what replaces timesheets, and it does a very good job in a short space making my arguments.
I had no idea that Barry Lindbeck would be quoted, but I am confident I know why he was leaving money on the table without timesheets. He wasn’t really Value Pricing. If he truly believes that he left money on the table because of uncaptured hours, then he is missing the point completely.
There is no correlation between hours and value. I don’t know how many times we have to repeat this for it to sink in?
I further conjecture his firm wasn’t utilizing, or capturing, Change Orders, which will put a damper on a fixed price contract. I would also bet his firm was, shall we politely say, substandard with respect to project management skills.
To argue you can’t compute WIP without timesheets is nonsensical. I’m sure Barry studied percentage of completion accounting, and you don’t need timesheets to do that.
What’s truly annoying about the tone of the article is there is no recognition that accountants are knowledge workers. Quite frankly, we are too talented to waste our time accounting for every six minutes of our day, especially since it has NO relationship to value.
Firm leaders that don’t understand this treat their employees like waiters, not chefs. Is it any wonder our profession is losing talent, and not attracting the best and brightest? Who wants to work for someone who insists they account for every minute of their day? Stars don’t work for idiots!
Barry wheels out the old canard of measuring productivity, but this is preposterous. A timesheet does not measure the productivity of a knowledge worker. I’ve written entire books on this subject. Someone can look excellent on a timesheet while being an ineffective knowledge worker.
A timesheet can’t measure the bedside manner, communication skills, pride, passion, creativity, innovation, and all of the other intangibles that comprise an effective knowledge worker. To believe it can is an illusion our profession has suffered under long enough.
The article ends by quoting David Connell, a consultant to the profession in Australia, and one whom with I’ve crossed swords in the past. With respect to timesheets, here’s David’s advice:
As a one man band I can do it pretty easily, but you start to introduce partners into the equation and they all have a different view of value. I advise accountants to fix the price of their services but still keep timesheets so they can measure staff performance.
This is nonsense on stilts. David hasn’t had a new idea since the Soviets launched Sputnik. It’s time he realizes we live in a knowledge economy. The fact that he wants to impose Frederick Taylor-type measurements on my fellow colleagues offends me to no end. With advice like this, we don’t need consultants.
Study the difference between a knowledge worker and factory/service worker, David. These people deal in ideas and intellectual capital; they don’t crank out widgets in a factory. You’re failure to recognize this is malpractice and ignorance, disregarding the reality that exists all around you.
If Nobel Prize winning economists have trouble measuring the “productivity” of a knowledge worker—not to mention their effectiveness and capacity to create value—then certainly filling out a timesheet is not the solution you seem to think it is.
Study the Toyota Production System, and ask yourself—if you have any intellectual curiosity left—how they operate without a standard cost accounting system? A timesheet will never be able to tell you how much money you are leaving on the table. And that sum, I guarantee you, dwarfs any marginal gains you will make in “efficiency” by tracking every minute of your day. You are confusing being busy with being effective and creating value.
Businesses don’t exist to be efficient; they exist to create wealth for their customers. I’m sure the buggy whip manufacturers were efficient. So what? In a knowledge environment, effectiveness is far more important than efficiency.
The existing leadership and consultants to the profession are the problem. They wonder why no one wants to enter or stay in the profession. Ritz-Carlton believes its dishwashers are knowledge workers; it treats them as such. Toyota does the same, implementing over 1 million ideas per year from its front-line workers.
Isn’t it time the leaders and consultants to the profession recognize accountants are knowledge workers? Unleash their brains, give them the autonomy they need to add value, and stop micro-managing them to make up for the lack of your pricing and project management skills. Until we do, our profession is not going to attract stars.
In short, there is no value to an hour becasue customers of professional knowledge firms don’t buy time. Oh, and by the way, stars don’t work for idiots.
Ed Kless - 04/27/2007
As a special treat for the readership of VeraSage, I present the following book review by my friend and mentor, Howard Hansen. Howard was the vice president of human resources for Great Plains Software in its heyday. Great Plains was featured as one of Fortune Magazine’s Top 100 Companies to Work For for several years and Howard played a big part in that recognition.
I’ve been reading Ayn Rand and Business, a new offering by authors Donna Greiner and Theodore Kinni (Texere). Rand’s theory of objectivism - best articulated in the famous John Galt speech in Atlas Shrugged - has a committed following. Ayn Rand and Business explores objectivism and attempts to tie its principal tenants to contemporary business issues. While objectivism’s rigidity can be uncomfortable - Rand demanded a cult like adherence to her beliefs and followers who strayed were sometimes exiled - there are characteristics of the philosophy which fit well with effective business concepts.
Notable is the power of shared values, a carefully selected and articulated list of behaviors employees are expected to follow in all situations.
Rand believed in always exercising rational thought above and before emotion. She argued that the key values supporting rationality are: Independence, Integrity, Honesty and Justice. Authors of Ayn Rand and Business explore definitions of these terms with interesting insight. I plan to suggest these values for consideration to my clients who use shared values in their organizations and take them seriously enough to review, revise and define them.
There are a couple of more nuggets to explore from this book. One is the view managers must take of employees in the Randian World. Another is how Objectivism and Healing Leadership link together.
The authors write that Rand had ideas about the relationship between employee and employer. She believed in three basic ideas:
- Employees work for themselves not their employer.
- Mutual respect and voluntary cooperation are foundational to successful employee-employer relationships.
- There is only one correct way to judge employee performance and that is on “rational merit”.
The idea that employees work for themselves and not for a company or organization is dramatic. It suggests there is no value in traditional management approaches to improving individuals’ performance. And it certainly defines the still too frequently used method of “management by intimidation” as ineffective at best and harmful at worst. The authors write, “Outright physical violence has largely disappeared as a management strategy (in today’s organizations), but less-overt forms of force are still in evidence. Some managers resort to verbal intimidation and threats to motivate employees.”
Which brings us to Healing Leadership. I have long held that leaders need to see themselves as healers in their organizations. Employees in pain, especially pain created by their experiences as employees, are distracted, unhappy and generally unsuccessful at their work. Bosses need to see these traps and help their employees spring themselves.
Often this unhappiness is driven by fear. This fear can be created by a toxic environment whose ingredients are both obvious and subtle.
The authors of Ayn Rand and Business quote W. Edwards Deming: “Drive out fear so that everyone may work effectively for the company.” This behavior, “driving out fear”, is a rational objective. It is undertaken to create higher performance through the establishment of a “rational, objective atmosphere of trust, mutual respect, and freedom at work.”
Thanks, Howard.
More of Howard’s writings can be found at www.healingleaders.com. Please take a few moments to visit this very different site.
Ed Kless - 04/24/2007
Once again, I was leading a dialogue about hiring people. And once again, it was a group of baby boomers in management roles. And once again, the position of most of the room was the same.
“These generation Y people (30 and under) are lousy hires.”
“They expect the world to be just given to them.”
“They don’t get that they need to earn their way.”
Then, the question suddenly appeared to me. Why is it that the generation who said, “Don’t trust anyone over 30,” now refuses to hire anyone under 30?
Thoughts?
Ed Kless - 04/24/2007
I have a confession to make. Ever since I first heard Ron Baker speak, I have been jealous of the fact that he created a law — Bad customers drive out good customer.
After reading the story about How Wal-Mart’s TV prices crushed rivals last night, I was inspired to create my own law — Those that live by the discount, shall die by the discount. I am sure this is not an original thought but I am claiming it anyway.
The Wal-Mart story is clear an example, but I would love for you to contribute to this space examples of this, Kless’ Law, in action. (At least I am no longer jealous.)
Ron Baker - 04/23/2007
Dennis Howlett, who blogs at AccMan, recently sent me this Value Pricing success story. Once again, this proves that focusing on value is far more important than focusing on costs. This is also exactly why timesheet are not necessary. Does Dennis need a timesheet to know whether or not this job is profitable?
Hi Ron:
I thought you’d like to know. I just completed a section of an ongoing ‘open’ consulting gig where the client doubled my expected fee for the latest part. It was odd. I had to react very quickly to events and there was no real time to stop and sort out a change order. It was all done on the fly.
When we got done I called the client and said: “So what do you think that was worth seeing as we didn’t have time to sort anything out?” Client says: “I don’t really know.” (Hint: Client is a lousy negotiator.) I then suggested a figure knowing I had no real clue about time spent. client says: “Oh no, it’s worth much more than that, tell you what, let’s double it.”
There’s 2 PS’s to that: 1) We’re on to the next phase now where we’ll be talking serious money. 2) I wrote up my idea of an ideal client out of that experience which David Maister picked up on.
Value pricing works—but it helps to have the right client!!
And here’s a follow-up to the story from Dennis:
So here’s the kicker for the next stage of the project. We know there will be a huge commitment, it will be complex and there will be significant risks. We’ve found a way of underwriting the entire project so that the client has zero financial risk. We will partner with 3rd party sponsors who are invested in the project’s success for “their” long term benefit. We can do this because the project’s outcome provides a natural environment for 3rd parties to take an interest. (Sorry if I’m being vague but the details are under wraps.)
In other words, we’re recognising that this project (and it won’t apply to all) impacts the client’s wider business partner ecosystem on completion. We’re saying in effect, look beyond the immediate outcomes to accelerate monetization. So why not engage with those folk now as a way to ensure that everyone is a winner?
That creates some interesting issues around project management but we believe that because we have extended the ‘interest’ in the project, everyone will be incentivized to make it happen.
As consultants on the project, we are effectively creating a ‘business within a business’ for the project so that no-one gets hurt and everyone gets fairly rewarded for their efforts.
We think that’s a recipe for success and if my memory serves me correctly, it plays back to things you’ve said in the past.
This example proves that professional knowledge firms sell and leverage intellectual capital. Why in the world do we keep a timesheet, which is a completely different yardstick? It’s like plunging a ruler into your oven to determine its temperature.
Thanks for sharing Dennis!
Ron Baker - 04/23/2007
Here’s a great email any writer loves to receive.
Hi folks,
Ron’s book has definitely revolutionized the way I bill my services.
I bought his original book ‘The Accountant’s Guide to Value Pricing.’ [sic, actually, the title is The Professional’s Guide to Value Pricing]. It cost so much that I treated it very gingerly, thinking I might return it, until I read about the first 20 pages and realized it was pure gold.
I realize that Baker has now issued new editions with a new title which is cool. But I am trying to find, without luck so far, a copy of the original ‘Accountants Guide to Value Pricing’ either new or used. I imagine it’s out of print but does anybody have any hanging around that I could buy or otherwise get my hands on.
Grazie.
Walter Fey, CPA
Hi Walter,
Thanks for the inquiry. Maybe you haven’t been able to locate a copy of the book since the title you are using is incorrect? The official title is The Professional’s Guide to Value Pricing, which was the title from edition’s one and two. The third edition through the sixth dropped “The” from the title. The first two editions were published by Harcourt Brace Professional Publishing, the third and fourth by Aspen Publishers, and the fifth and sixth by CCH, Inc.
I have seen old editions being sold on Amazon, while others tell me there are some on eBay from time to time (my brother always tells me he sells his copies on eBay!). I’m not sure which edition you have or want, but I can tell you that each new edition contains substantial updated material, with the 6th edition being the most recent. I’ve also written three other books since Professional’s Guide to Value Pricing, all published by John Wiley & Sons, Inc. You can find them here.
I hope this helps, Walter. Thank you for reading my work. It’s music to my ears that it has revolutionized how you price your services.
Ron
Ron Baker - 04/23/2007
I received the following email from a sole prop CPA regarding how to deal with low value services and price tax returns.
RON,
Just listened to an archived PCPS presentation on value billing from last Nov. 2006.
I also have a copy of your value pricing book, The Professional’s Guide to Value Pricing.
I am a sole-CPA with one part-time bookkeeper. Most of my write-up and payroll clients are already fixed fee. My 1040’s are usually what I charged them last year plus cost of living. My original fees were based upon a budgeted set of hours. As you said, I am generally stuck on what I charged them the previous year plus COL.
My questions for you are:
A lot of 1040 clients perceive a CPA the same as H & R Block. How do I raise the perceived value for a basic 1040 or can you ? How do I know if I am under billing for 1040s, except basing it upon what other CPAs charge per hour?
I agree with you that to be more profitable, you need to capture the value from the client. Are you saying that I should stay away from low value services ? That is the bread and butter of Sole-CPAs.
Any comments would help!!
Richard
PS, I threw out my time sheets this tax season because it got too time consuming to keep track of 2 hour 1040 clients.
Hi Richard,
Thank you for listening to the AICPA presentation, and reading my book.
You’re questions are ones we get a lot, and I think we have to start with how you perceive yourself. If you think you’re H&R Block, so will your clients. If you think you’re worth more than H&R Block, so will your clients. And no, I’m not saying you should avoid low level work, but I am saying that you should only allocate so much of your capacity to it, and certainly not add more capacity to take on more of it.
Also, please don’t let what other CPAs charge have influence over you. They are not you. What is your unique value proposition? Why would you let your dumbest competitors set your price?
One innovative method is to offer your 1040 customers a menu option, similar to American Express’ Green, Gold, Platinum levels (some firms use bronze, silver and gold, or some variation).
At the bronze level, you only do the 1040, for a competitive price (but certainly more than H&R Block, you are a CPA and CFP!). At the silver level, you might bundle in tax planning and unlimited phone calls and meetings throughout the year. At the gold level, you might bundle in audit representation and perhaps a financial plan review (something of high value to the customer, but low cost for you to provide, and that showcases your expertise).
This is just a very rough example. You can find more on our Web site, http://www.verasage.com, under Trailblazers. You really have to put some serious thought into your bundles, because they have to match your competitive advantage and strategy. But we have seen this strategy used hundreds of times, with great success.
My colleague, Dan Morris and I, run a 1-1/2 day Sole Proprietor Retreat for the California CPA Education Foundation. This year will be our third one.
We usually have about 7 people (we limit it to an intimate group), and the goal is to provide sole props with a partnership retreat. We call you in advance, and the group sets the Agenda. Most want to cover pricing, strategy, customer service, team members, etc. Then we provide you with a flash drive full of tools to help you implement, and have a follow-up day (usually in January) to get you going for tax season. This year’s retreat is Nov 9-10 in Los Angeles.
We are also running one in June for the Maryland Association of CPAs. We have had great success with them, and they are a lot of fun.
I hope this helps.
Sincerely,
Ron
Ed Kless - 04/16/2007
An article in the Houston Chronicle today details the trials of “cub lawyers” in their quest to work fewer hours, attempting to have a better work-life balance.
The columnist, Mary Flood, does a great job describing the problem, but she does not address the cause which is the billable hour itself. Perhaps this was beyond the scope of her story.
I quite enjoyed the following paragraph:
“I like the idea,” said Lynne Liberato, a partner at Haynes and Boone. “Paying less for fewer hours worked sounds great in theory, but if they don’t do the work, who is going to do it?” Liberato noted that even if law firms try to change things, it’s clients who demand billable hours and judges who dictate the sometimes onerous schedules.
Two things jump out at me. First, Lynne asks “Who is going to do the work?” This is LOL funny! Who indeed! Lynne believes it is her right to demand the hours for new associates. What rubbish! Second, “it’s the clients who demand billable hours.” Could she be more wrong? No client has ever demanded hours. Clients want results, hours are effects.
It is time for all professionals, lawyers, accountants, technology providers to wake up. It is past time to realize the billable hour is what is killing your companies.
What say you?
Ron Baker - 04/16/2007
Erich Hahn, of the CEO Forum in Australia, wrote a review of Pricing on Purpose, and then is interviewed on pricing. Read ”Is the Price Right?”
Also, an unnamed “West Country general practitioner has been inspired by Ron Baker’s latest book.” This from the AccountingWeb in the UK, reviewing Measure What Matters to Customers.
Ron Baker - 04/16/2007
Senior Fellow Paul O’Byrne recently toured Australia, sharing the Value Pricing gospel to lawyers down under. Somehow, he found the time to be interviewed by Simon Tupman, a former practicing solicitor in London, he now consults to law firms in Australia.
Simon has written a great book, Why Lawyers Should Eat Bananas, which I read about 5 years ago and thoroughly enjoyed.
Ed Kless - 04/12/2007
In a previous post I had written extensively about the elements of a scope document. One of those elements is project change control. As a reminder this section of the scope document simply says that the scope document can be changed (amended) and defines the process for doing so.
In almost all of the small and medium business information technology projects that I have been associated with there have been usually dozens of change requests. In fact, I cannot think of a single project, however small, that there were none. I believe it would be Twilight Zone weird that any project would have no change requests. Any project worth scoping will be, by definition, one that lends itself to changes. If a customer expects that a project will not have any change requests, they are probably not a good customer to have. No one can predict the future. The comedian Dennis Leary has a great line, “Psychic Friends Network went out of business… you think they would have seen that coming.”
Please note that the language that I use for these is change request, not change order. They are, by definition, requests and may be accepted or rejected by the project sponsor (steering committee, on a larger project). A change request is simply an acknowledgment that something that affects the Triangle of Truth needs to be adjusted. In some cases there may not be any budgetary or price change. For example, during an implementation of software the controller may leave the company. The resolution for this may be to push the “go-live” date of the project out, rather than adjust the financial resources. Even if there is no change to budget this is still a change request and needs to be approved by the project sponsor.
Let’s look at the elements of a change request with some commentary.
- Project name
- Change number
- Project manager name
- Requestor name — in my view on small projects anyone on the project (customer or consultant) can request a change. In many cases the project manager would assist in the creation of the change request document and would most certainly review it before presenting it to the executive sponsor.
- Requested date
- Resolution requested by date — “ASAP” is not allowed at a date. ASAP means different things to the sender and receiver. To the sender it means now emphasis on the word, soon. To the receiver it means whenever emphasis on the word, possible.
- Description of change
- Business reason for change — This section must describe the economic benefit that the change will create. In short, if the economic benefit does not exceed the cost section below, it is unlikely the change will be accepted.
- Impact on scope — In a sense a change request is a mini scope document. Please remember that when scope changes there must be a change to cost and/or time. See the Triangle of Truth.
- Impact on cost — This would detail the pricing change needed to perform the change.
- Impact on time
- Impact on quality — Remember if quality is affected all three of the other elements (scope, cost and time) must also be affected.
- Change accepted or rejected
- Reason for rejection, if rejected
- Signatures and dates
Lastly, change requests should be listed in the issues list (I guess I need to do anther post on this document) or in a separate change request log if the changes are great in number.
Ed Kless - 04/07/2007
In addition to Ron’s excellent post on lawyer’s where the Chief Justice of the Australian Supreme Court called for the end to the “tyranny of the billable hour,” comes this from WebCPA - Intuit Survey: Accountants’ Hourly Rates Up.
Buried in the fifth paragraph is this, “Additionally, the survey showed that more than 35 percent of all respondents offered at least one fixed-fee service, which is an increase of about 3 percent over last year.”
The tide is turning.
Ron Baker - 04/06/2007
Here’s a great question from Micael Golub, CPA, from NP Solutions, Inc. in Riverside, CA:
Hi all. I was having an e-mail chat with Ed Kless and brought up the concept of offering options within the different level scopes of a value priced proposal. I’m thinking about the benefit or detriment of offering add-on (no add-offs) to a value priced proposal. This would be contingent upon an add-on that does not rely on some other process. For example, here’s a middle scope but there’s something that the client would really like from the high end. Could that be offered as an option? The client is telling us they want it, we can value price it and adjust the scope accordingly. Or is it better to stick with, here’s what we’re offering based on our perception of your needs?
Thanks for your input.
Michael
Hi Michael,
This is a great question. In fact, it’s an advanced question. It illustrates the limitations of the “menu strategy” of pricing—that is, offering options similar to American Express’ Green, Gold, and Platinum credit cards.
I don’t want to over analyze my answer, Michael, so let me say from an expedience standpoint go ahead and provide the customer what he wants and do a change order.
If you are interested in taking this discussion further (and I know Ed is), then let me explain why I’ve always had issues with the “menu strategy” for Professional Knowledge Firms (PKF).
I don’t think a PKF needs to be as rigid as AMEX is with its credit card options, simply because we can meet with our customers one at a time and give them exactly what they want.
In a perfect world, value selling would be used to craft a completely customized FPA, with everything the customer wanted, no comprises. Don’t make a Pepsi customer have a Coke.
I actually only started advocating the menu strategy as a way to ease people into implementing Value Pricing, but it took off, and got good results. I’ve always been skeptical of it. Here’s what I wrote in Professional’s Guide to Value Pricing, Sixth Edition:
This type of pricing is not without its disadvantages, however. One issue is that the customers might not perceive the options as tailored to their specific situations, and thus they may feel as if they are being sold an off-the-shelf bundle of goods. They may not want or need many of the items included. Another problem with this type of pricing is that firms offer a fixed price, set in advance—with no customer involvement—for each level of service. This is a serious mistake. Pricing should never take place in a vacuum, and because the customer is the final arbiter of value, one should always establish a price with the input of the customer. Finally, this type of pricing may give the marketing manager and the partners a false sense of security. They will think they they have covered anything that a business owner may want or need, but this is rarely the case. Packaging services into groups is an excellent strategy, but not if doing so is at the expense of creatively customizing services in order to meet any one customer’s specific circumstances.
Notwithstanding the problems with the menu method, it carries many advantages. A thoughtfully crafted menu pricing strategy does allow your firm to respond to (or forestall) certain competitive threats. It can enhance your revenues while minimizing your revenue loss due to price fluctuations. This method can also help you manage the cost of delivering services to a particular niche as well as capitalize on marginal price changes for any one customer. One last important advantage is that customers seem to approve of the policy.
AMEX, airlines, and other companies provide menu options because they can’t meet with every customer, it’s simply too expensive. If they could, they could customize a credit card for every customer. Indeed, this is precisely what Verizon wants to do (with its 30 million customers!), according to its Chief Pricing Officer. Ultimately, pricers like to price one customer at a time, and not put people into buckets. Imagine if your water company could price each ounce depending on exactly what you were using it for? The price would be much higher if you were dehydrated as opposed to washing the dog.
PKF’s transaction costs are essentially zero to customize a price, so they shouldn’t need to segregate customers into buckets.
That said, if after assessing all of your customer’s needs and wants, you still offer options, based on customized bundles, I might see some advantage to that. But it is still a customized option plan, rather than a pre-packaged program.
And if you know the customer well, why wouldn’t you be able to price exactly what they want the first time?
None of this is meant to deny that the menu option strategy is highly effective for RFPs.
I know Ed’s going to chime in on this as well, and we very well may have a debate. But let me say this: any pricing strategy has both advantages and disadvantages. You must select those where the former outweighs the latter, for each and every customer.
Remember: a pricer always wants to price one customer at a time. It is the dream world, and PKFs can come much closer to it since they meet with customers one at a time, at far less expense than can Verizon. Why wouldn’t we want to take advantage of that situation?
Ron Baker - 04/06/2007
Once again, more chatter from the Australian Lawyer’s Weekly. The billable hour is like what Mark Twain said about the weather: everyone talks about it, but nobody does anything about it. ”Scales of (billable) justice,” an article from April 5, 2007, once again proves how lawyers just don’t get alternative pricing.
I love this line from the article:
“The only people on hourly rates work as plumbers, at Burger King or at law firms,” says general counsel for BEA Systems in Europe, Nils Breidenstein. But increasingly, firms say, they are looking for alternatives to time-based billing, which is renowned for trapping lawyers into a working formula of six- or eight-minute units. The billable hour has for years been an irritation for many in the profession, and the clients they serve.
Engage in this experiment for me the next time you drive through a fast food outlet. When you get to the window, do you take the food first, or pay your money first? Yes, Burger King employees may very well be paid by the hour, but Burger King executives at least understand the importance of providing their customers with a fixed price, and being paid BEFORE the product is delivered. Why can’t lawyers understand this?
Even the Chief Justices in Australia understand the tyranny of the billable hour, reminiscent of Supreme Court Justice Bryer writing the Foreword to the ABA’s Commission on Billable Hours report issued in 2002. Here is what two of the Australian judges had to say:
Chief Justice Spigelman has attacked time-based billing, and has called for an end to the “tyranny of the billable hour”. He has criticised the entrenched methodology, saying “I do not believe this is sustainable”. High Court Chief Justice Murray Gleeson has also said it is “difficult to justify a system in which inefficiency is rewarded with higher remuneration”.
They get it, but the law firm leaders don’t. I couldn’t believe this line from Tom Poulton, managing partner of Allens Arthur Robinson:
“I would say that we would be very happy to move off the hourly rate, but every time we try to get off the hourly rate, it is met with resistance because in the end the clients think they can control the number of hours we spend on something when they mightn’t be able to control some other pricing structure. Everyone says very rationally it would be good not to have hourly rates, but I am not sure anyone has a clear idea of what is a sensible pricing structure for legal services,” he said last year.
“There is always the suspicion when you propose billing on a non-hourly rate that we are suggesting it because there is something better in it for us. We have to convince them that it is not necessarily so, but that we are offering a situation that is better for both of us. We are trying to get this right.”
There are many problems with these statements. The first is how he’s shifting responsibility to the customer for changing his firm’s pricing paradigm. That’s nonsense. It’s not the customers job to innovate, it’s the law firm’s.
It’s the second problem that bothers me more. His statement that he’s “not sure anyone has a clear idea of what is a sensible pricing structure for legal services.”
Hello?
How many books have been written on this topic? Three seminal works from the ABA, by Richard C. Reed, dating back to 1989. Six editions of Professional’s Guide to Value Pricing, by yours truly, dating back to July 1998. Not to mention books by Alan Weiss, Jim Calloway, Reed Holden and Tom Nagle, and many others you can read in our Suggested Reading list. All of these books provide a clear alternative to hourly billing—specifically, using price-led costing, leading to a Fixed Price Agreement and Change Orders for scope creep.
Now lawyers are some of the smartest people I’ve ever met, so I know it’s not stupidity that causes them to say things like Mr. Poulton has. Is it intellectual laziness? Do they not observe how their own customers price their good and services? No business uses hourly pricing, it’s ludicrous. It is a historical anomaly.
Another problem is with his notion that customers will be suspicious of non-hourly rates. But this is nonsense on stilts. If you discuss value with the customer first, and that value determines the price, which drives law firm costs, and the price is approved by the customer before the engagement, then it’s the purest definition of win-win. The article quotes several general counsel who are screaming for exactly that process.
Even more absurd is what the director of marketing, David McClune, from the same firm said:
“[The Australian market] is too small to sustain one premium provider that people come to irrespective of the cost.”
Is he kidding? The size of a market has nothing to do with this. But that said, he’s wrong. When I visited Australia I saw many high-end automobiles. Obviously these owners paid a premium price, even though the Australian market is relatively small.
McClune also says this:
McClune says there is discussion between firms and clients about how to find a suitable alternative to time billing. “There is dialogue about better ways to bill, but no one is really coming up with the answer,"…
Mr. McClune, with all due respect, we have the answer. We’ve had it since 1871 to be precise, with the ushering in of the Marginalist Revolution, which explained how all value is subjective. We’ve had it since Henry Ford and Toyota began utilizing price-led costing in the early 20th century. The fact that you are not aware of this is surprising.
Folks, other than intellectual laziness, what could be the reason for this? I’d love to hear your thoughts.
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