VeraSage

Ask VeraSage:  Creating a Pricing Cartel

Ron Baker - 07/23/2007

Chris Foster, one of our Trailblazers, asks the following question:

Hi Ron

I’ve been running your recorded Value Pricing Session as presented at the Principa 2020 conference in Sydney this year over the last 2 months.

I have a regular core group of people turning up at each session.

I believe we are really getting value from these sessions, based on the feedback from the team members.

I suggested that we set up a working group to discuss and develop these concepts further and there was an enthusiastically positive response as the teams likely involvement.

My question is:  how should I structure the direction of this working group so that it will result in something meaningful rather than just a talkfest. And what resources do I need to access?

Thanks again Ron for your inspirational leadership in the profession—I can see apositive impact on our team attitude just from the Lunch & Learn sessions and the active discussions held at the end.

Regards

Chris

Hi Chris,

Glad you’re getting value from the Principa Value Pricing session.

I’m a bit confused by your question, since I don’t know how your pricing is structured.  We like to see a pricing cartel (panel, council, call it what you will) established in the firm, which has primary responsibility for pricing all engagements.  These people are chosen, usually, by the leaders of the firm based on their demonstrated pricing skill.  They are usually fairly easy to spot; they are the ones who view pricing as an enormous opportunity, are intellectually challenged by it, and are willing to continuously learn more.

The cartel is also responsible for educating firm members on change orders, scope creep, FPAs, etc., as well as sharing pricing successes and failures.  They also conduct After Action Reviews on all major engagements to learn what could be done better—both for pricing and customer service—next time.

So I guess I’d like to see a pricing cartel emerge from your Lunch & Learns, and maybe even an appointment of a CVO.

Once you’ve appointed your pricing cartel, we have a CVO reading and resources list I’d be happy to share with you.

I hope that answers your question, Chris.  Keep up the great work.

Why don’t CPA firm leaders trust their people?

Ron Baker - 07/21/2007

Dan Morris and I recently presented two courses at the California CPA Education Foundation CE Week in San Diego.  One of our colleagues in the first course we presented, When Debits Don’t Equal Credits, sent us a very interesting email that illustrates the general frustration we at VeraSage have regarding the lack of leadership in our profession.

Not only don’t firm leaders trust their people to do their work—hence the insane requirement they account for every six minutes of their working lives—they also don’t trust them enough to give them free access to the Internet at work.

Here’s how Richard Muscio explained it to us in his email:

Good morning Ron! 

I want to relay an experience that I had at CE week last Friday, only because I guess I need a shoulder to cry on...my apologies in advance.

Anyhow, after 4 great presentations Monday through Thursday I had the misfortune of finishing the week with a course called “Internet and Network Security:  A Paranoid’s Guide.”

The instructor was good, and his outline was good, but the course went in the direction of the crowd’s questions, which usually isn’t such a bad thing, but in this case it was.  The audience seemed most interested in how to monitor their team members’ use and abuse of e-mail, the Internet, etc., on the assumption that team members are wasting lots of employer time handling personal matters at work.

The instructor pointed out how “the boss” can measure all of these activities, down to time spent using e-mail and websites most often visited and for how long.

So, not only does employee chargeable time get measured down to the 10-minute increment, employers can measure how team members are spending their time when they aren’t charging clients for their time...wow.  I guess this is what happens when team members don’t have challenges to pursue, and “the boss” is a dinosaur.

I really love my profession, but sometimes I get real frustrated.  I mean, what a way to finish an otherwise great week. 

Sometimes the gap between my vision of what the profession could be and what it presently seems to be is wider than Rosie O’Donnell’s rearend.

But on the bright side, I have another great story about why the timesheet needs to be buried 50 feet deep…

Best regards,

Richard Muscio

Supposedly, PKF firms are built on trust.  Not only trust with our customers, but also trust with our team members.  How can you build a climate of trust in an organization if you believe you have to monitor your team members’ every action, whether on the Internet or doing their work?  Is this any way to inspire knowledge workers?

Is it any wonder why no one wants to work for these types of firms?  Stars don’t work for idiots, and the surest sign of idiocy is not trusting the very people you hire.

In his latest book, What Were They Thinking?, Jeffrey Pfeffer recalls what Jim Goodnight, cofounder and CEO of the largest private software company, SAS, told him in an interview.  Goodnight “considered giving people the Web addresses of sports and pornography sites so they wouldn’t have to spend so much time finding them.”

I know the lawyers will explain why this is a bad idea since we live in such a litigious society with sexual harassment suits, etc.  But who wants to work in a PKF where the leaders don’t trust you to use your professional judgment and discretion? 

Little wonder the accounting and legal profession is having such a difficult time attracting, developing and inspiring knowledge workers.  Rather than blaming the market, they should examine their attitudes.

Blogger’s Choice Awards

Michelle Golden - 07/21/2007

I’ve nominated VeraSage for Blogger’s Choice Awards in two categories: Best Business Blog and Best Education Blog.

I didn’t feel funny as though I’d nominated “myself” because I seldom contribute to this blog {heavy guilt!} which is so profoundly led by Ron Baker and Ed Kless and made SO much better, even, by the fantastic contributions via “comments” of people who follow the blog as well as those who contribute material for the Trailblazers section.

If you love this blog, vote by clicking a button (takes a second to sign up and verify by email).

Another Nail in the ABH Coffin

Ed Kless - 07/20/2007

The New York Times reported last Saturday that “lawyers paid by the hour are less qualified and let cases drag on and achieve worse results for their clients, including sentences that average eight months longer.”

In my view this is one more nail in the coffin of the Almighty Billable Hour and is a derivative of my now semi-infamous quote from my recent podcast, “If you suck at what you do, bill by the hour.” To that, let me add, “If you have been indicted, get an attorney who does not bill by the hour!”

Thanks to Tom “Bald Dog” Varjan who sent me the link to the story.

Can you value price training?

Ed Kless - 07/20/2007

Terri Wilson of Offcierge, Inc writes:

I am not a CPA but instead support CPA firms with my QuickBooks consultancy. We actually share our office with a firm. I have been moving toward the value pricing model for my projects but am stuck on one issue. I can’t figure out how to deal with training time. I have gone to selling a day of training but I still think that isn’t correct. I have thought of setting up programs of training but I am not certain that that best serves the customer’s needs. Currently we train on their system with their data and documents. My issue is that (of course) some folks are very fast learners and other folks, well, not so much. I would love to hear your thoughts on this.

Thanks for your question Terri.

Pricing training can be quite a challenge and not knowing you entire situation I am going to have to make some assumptions based on your email. However, I think there are some potential answers built right in your question.

First, having a fixed price for a training class is not necessarily a bad idea. I would however add some restrictions (or scope) around the training, for example, training up to five (or some other number of) people per class with an additional charge per person beyond the base. The class is of fixed scope based on an agenda, so if it takes four hours or eight, it does not matter as long as the material is properly covered.

Second, for the, shall we say, digitally challenged, I would build in some feedback system that allows for you to test to see if knowledge was successfully transferred during the training. The mechanism I have used is called a test script. You design a set of specific tasks that the user should be able to perform after the training. As they complete each step they check it off the list. When the script is successfully completed, they sign off on it. Having this in place protects you in the event that someone comes back requesting more training as covered under you original agreement.

Third, you mention that you are customizing the class, this is great, because you are differentiating your training from other more generic offerings, and as a result you should command a premium price over standard classes.

I hope this helps. I would be interested in what my fellow VeraSage colleagues have to say about this as well.

Ask VeraSage:  Do realtors Value Price?

Ron Baker - 07/14/2007

Interesting question sent in from Lance:

Hi and thank you,

From my understanding most of the time the sale of the home carries a 6-7% commission of the purchase price—generally 3% for the buyers agent and 3-4% to the seller’s agent.

I could be way off and am not trying to be offensive, but it seems to me that this commission is not really based on value to the buyer and seller but instead on a generally accepted practice.

It would seem almost offensive to try to negotiate a lesser commission with a Realtor.

So this commission is not based on billable hours, but it does not seem based on value either.  Why should selling a $1M home in a “sellers’ market” yield twice the commission of selling a $500K home in a “buyers’ market?”

I would love to hear your thoughts on the subject.  ...and again, I’m not trying to be offensive to any realtors out there—maybe I’m completely wrong.

Thanks,

Lance

Great question, and one I’ve never spent a lot of time researching or thinking about.  It’s very similar to how advertising agencies used to be paid a commission on media spend, which of course during the stagflation of the 1970s the customers grew uncomfortable with and agencies switched pricing methods—unfortunately, they went backwards to billable hours and cost-plus forms of pricing.

That said, the commission model still probably represented value more than billable hours.  Though admittedly, both are based on inputs and costs, rather than value and results.

At least the Realtors’ commission is tied to results, as no sale, no pay.  I have heard of people negotiating a lower commission, but it is probably rare.

I think what you’re describing is a long-entrenched tradition, and those are very difficult to change.  The Internet is providing some pressure, since there are now Web sites to help you sell your own home.  But the opportunity cost of time and trouble is simply too large for most people to fret over, so they gladly pay a commission.  That is the price we pay for being a wealthy country.

I’m not sure this answers your question, and I’d love to hear other theories.

I Don’t See The Problem

Ed Kless - 07/09/2007

Sprint announced today that is was firing 1,200 customers of 53 million or .002% for excessive calls to their support line. This has caused quite a scuttle.

Frankly, I don’t see the problem except to say that they probably should get rid of 120,000 not just 1,200.

What say you?

The Halo E(A)ffect on VeraSage

Ed Kless - 07/01/2007

Recently, I read The Halo Effect by Phil Rosenzweig. It did the one thing that I really look for in a book, it made me think. The basic premise of the book is that concluding successful companies all share certain characteristic like a brilliant strategy, a visionary leader, and a great culture is a delusion. (The book offers a great analogy for understanding the difference between and illusion and a delusion. An illusion is seeing Michael Jordan fly; a delusion is thinking you can be Michael Jordan.) This challenges many of today’s most successful business books from Peters and Waterman’s In Search of Excellence to Jim Collins’ Good to Great.

I will not repeat all eight delusions here, but if you are interested they are posted in several of the Amazon.com reviews. Including one that I agree with, this would have been better presented as an article than a book. To me the point do seem to get quite repetitive. For example, Phil Rosenzweig presents the stories of Cisco and ABB to illustrate his point. I felt one was sufficient.

The book does raise some serious questions about even some of our beliefs here at VeraSage. The first of which is, “Is there a Halo effect of firms doing Value Pricing?” We trumpet our Trailblazers, but I have had many stories of firms trying to go to value pricing and failing miserably. I usually conclude that these were half-hearted attempts that were little more than cost-based, fixed-price engagements that lacked sufficient scope, but maybe there is something to it.

A second question raised is “Can there be any predictive indicators?” Ron Baker and I have talked before many audiences making a claim that there are. One of my mantras is citing a Xerox study from the 1960s that concluded “employee satisfaction yields customer satisfaction which itself yields financial performance.” In our defense, both Ron and I think that both employee satisfaction and customer satisfaction are measured too infrequently, certainly not as often as financial performance is measured. The Halo Effect does not address this issue of frequency of measure. Rather is only looks to annual measurements of each of these. Perhaps this is one answer to Rosenzweig’s criticisms.

This question also affects some of the work of David Maister. In fact, I emailed him about this and he responded with an excellent post that assisted in my thinking. However, his method, structured equation modeling, while it has many proponents also has its detractors, most notably Deirdre McCloskey. To be honest, I lack the understanding to argue either side, so I will just take the journalist’s way out and report the facts.

A third question is, “Has anyone looked for causality beforehand?” Rosenzweig does state that “Just to be clear, I think strong customer orientation probably does lead to better performance.” In addition, he argues that there is, in fact, partial causation from many factors. He makes a great point that most business people do not want to hear about partial causation, they want the one thing. This is absolutely correct. The belief that there is one thing or one path to success is a major problem. However, I am happy to have partial causation.

The Halo Effect does emphasize a widely held belief among the Fellows at VeraSage - Business is not physics, it is not even science. To quote Phil Rosenzweig, “We can’t put companies in Petri dished and run neat experiments. And since even the best studies of business, ones that carefully follow stringent research methods, ones that make sure to avoid Halos and that control for rival variables and make sure not to confuse correlation with causality, can never achieve the precision and replication of physics, then all the claims of having isolated immutable laws of organizational performance are unfounded.”

Economics is the one area of study that truly attempts to blend business and science together. However, The Halo Effect points out that only studying success is not good science, one must look at failures as well. This has touched off a dialogue between Ron Baker and me about the following question, “Does The Halo Effect (and Fooled by Randomness and The Black Swan by Nassim Nicholas Taleb) create a problem for one of the principle sources of our work, Adam Smith’s Wealth of Nations?”

I offer:

• Premise 1: In order to have valid scientific conclusions, we must look at successes and failures.
• Premise 2: Wealth of Nations looked only at successes. (Ron has often said we learn nothing by looking at poverty except of course how to create more of it.)

These are in apparent contradiction. As Aristotle said, if you have two premises and they are in contraction, one of them is in error. So, which is it?

Perhaps some solace can be obtained by looking at the work of economist Joseph Schumpeter, who believed that the basic force at work in capitalism is that of competition through innovation. i.e., creative destruction. I posit this is true of companies as well as the economy as a whole. What this does mean is that if you follow this path there is significant chance you will fail as well as succeed and this is what many business people do not like to hear. Choosing a strategy implies risk of being wrong, but you can’t play it safe.  Most companies pick strategy but do not fully execute it, preferring to hedge their bets on old standby formulas. However as we do believe at VeraSage, profits come from risk.

To conclude I will leave you with a paraphrase of one of The Halo Effect’s great lines - “Idiosyncratic contingency” and “causal ambiguity” are how PhD’s (and this blog writer) say, “I don’t know.”

Success is a calculated gamble, but gambling it is.