VeraSage

An HSD!

Ron Baker - 08/31/2007

An HSD is a High Satisfaction Day.  It’s one of those days where some event happens and you say, “This is why we do what we do.  This is what I was born to do.”

John Heymann, founder of NewLevel Group in Napa, CA, innovated this KPI, which I wrote about in Measure What Matters to Customers.

Here is an email I received from Hyperperformance, a technology solutions firm in Nigeria, Africa:

Hello Ron,

My first contact with you was through your book, The Firm of the Future, and I’m totally convinced about your insights and wisdom on the ways professional practices should be run.  I’m currently ordering for all the latest editions of the books you’ve written. I’ve been able to place orders for Measure What Matters to Customers, and Pricing on Purpose.

I have searched far and wide on the Internet for the 6th edition of Professional’s Guide to Value Pricing, but I can’t get any.  It’s unavailable at every store that I’ve been to including your site.

I’m based in Nigeria, I’ll be happy if you can recommend a site where I can get to order the book at a relatively good price.

I think you’re a blessing to the profession and I wish you all the best in all your endeavours.

(Keep the light shining bright, your impact is being felt around the world, even though you might not be aware of this, even in Africa).

GOD BLESS YOU!!!

P.S.  A big hi to Paul Dunn!

Wow, thank you for your kind words.  Unfortunately, the sixth edition to Professional’s Guide to Value Pricing has been discontinued by CCH, the publisher.  There might be some used copies available through Amazon or eBay. 

Also, my colleague, Peter Byers in New Zealand has some on hand.

You may also be interested in my forthcoming book (in November), Mind Over Matter, which is the third installment of my Intellectual Capitalism Series after Pricing on Purpose and Measure What Matters to Customers.

An HSD indeed!

The CPE/CLE of the Century (and the one your partners probably don’t want you to attend)

Michelle Golden - 08/30/2007

The Future is Already Here...It’s Just Unequally Distributed

For a profession to be truly innovative, it must not only do new things, it must stop doing old things. It is not possible to create tomorrow without first getting rid of yesterday.

You know there has to be a better way. And there is.

Attend THE event young professionals have been crying out for—given directly by the leaders of two REAL, practicing, thriving Firms of the Future—one law firm and one accounting firm.

Brendon Harrex, 33 year-old founder of the Harrex Group in Gore, New Zealand, and Chris Marston, 31 year-old founder of Exemplar Law Partners in Boston, MA, are revolutionizing the way professional knowledge firms are led.

Brendon and Chris are two of the professions’ most visionary leaders because they understand they attract knowledge workers, and therefore treat their employees radically different than the average firm: No billable hour quotas, no timesheets required, investment in education quadruple the average firm, autonomy to set your own schedule, and time set aside to pursue to your passions. Each has a waiting list of people who want to join their organizations!

Brendon and Chris understand that professional knowledge workers sell intellectual capital, not time. They don’t treat their people like union employees or children who have to account for every six minutes of their day. You are not galley slaves on the SS Billable Hour, but human capital investors who deserve to be treated with respect, autonomy, and dignity. They also know the partnership model is broken and they each have innovated new ways of running the businesses of their firms.

In addition to Brendon and Chris, many of the VeraSage Founders and Senior Fellows (from 30 to 65 years of age...all doing value pricing and ALL operating without timesheets) will be on hand to share their experiences and answer your questions. Come hear, from the horses’ mouths, what the future of the accounting and legal professions looks like.

If you’re discouraged in your “traditional” firm or wondering why you chose your profession in the first place, this is the knowledge and inspiration you need in order to reinvigorate your career. And meet the many others who share your frustrations. This proves to be a remarkable networking opportunity to create long-lasting friendships and business contacts.

This high-energy event promises to be extraordinary because it’s the first—and maybe ONLY—time VeraSage will simultaneously feature these young leaders of true Firms of the Future. Several other Senior Fellows of VeraSage comprise a panel to field audience questions about converting a traditional firm or starting their own Firm of the Future.

The future of the profession lies in firms led by innovative individuals. If you want a sneak preview of the improved and exciting future your profession, don’t miss VeraSage Institute’s Inaugural Young Professional Program.

• 8:30 a.m. - 5 p.m.

• Lunch on your own from 12-1 p.m.

• October 22, 2007

• Rio All-Suite Casino Resort

• 3700 West Flamingo Road

• Las Vegas, NV 89103

• 702.252.7628

Secure your spot and register now for $129. (priced so you can afford it even if the firm won’t pay...)

Dead Cold Fish!

Ron Baker - 08/27/2007

That’s how I think lawyers (and other professionals) who price their services by the hour would market sushi.

Talk about focusing the customer on things they don’t value!  What could be worse than quoting hourly rates with a comma in them?  An article in the Wall Street Journal Online, “Lawyers Gear Up Grand New Fees,” discusses how some of the country’s top lawyers have crossed the $1,000 per hour mark.

For the attorneys, I suppose this is as significant as Roger Bannister breaking the four minute mile—a milestone to be applauded, since it shattered the mental barrier that said it couldn’t be done.

What’s truly frustrating about this is the implicit assumption that hours equate to value.  It’s Karl Marx’s Labor Theory of Value, but it’s the elephant in the room that no one dare mention.  Mike Dillon, general counsel of Sun Microsystems Inc. even says:

Considering a major-league baseball player can make the equivalent of $15,000 per hour, $1,000 for very seasoned lawyers who can solve complex problems doesn’t seem to be inappropriate.

What an absurd comparison.  Baseball players get paid what they do because of the value they create, not the hours they spend playing the game.  They also receive a fixed salary, so the team owners assume an element of risk that the player won’t create as much value as they are paid.  All profits come from risk.  Professionals who price by the hour shift 100% of the risk to customers, which is why their profits are capped, and write-downs and write-offs exceed write-ups.

The article quotes Stephen Susman on his $1,100 hourly rate:

“It represents an opportunity cost when I am working by the hour,” says Mr. Susman, who last year raised his hourly fee to $1,100. He did it in part, he says, “to discourage anyone hiring me on that basis.”

But opportunity cost has nothing to do with value provided to any one customer.  Mr. Susman, I have a better idea:  stop quoting hourly rates altogether and have a discussion about the value you are creating for your customer, then price accordingly.  That way, no one will have to think about your Twilight Zone hourly rate.

A kindly debate with a Kiwi doctor over the value of tracking time

Ron Baker - 08/27/2007

One of the amazing things about Blog is the chance to meet and discuss ideas with people all over the world.  We’ve had some heated debates on this Web site in the past, but mostly we are preaching to the choir amongst our loyal readers.  This is because you already understand the concepts of Value Pricing and getting rid of timesheets.  You are what the scientists call early adapters.

So it’s always fun when someone writes in to challenge our theories, like Ted Needleman who wrote in response to my post Why we don’t need consultants.  I ended up sending Ted a copy of my book Pricing on Purpose.

I might be an aggressive debater on some of these topics, but that doesn’t mean I can’t change my mind or modify my theories.  After all, I learn very little from discussing topics with people who agree with me.  It’s never a waste of time to rehash these issues, even with people who are not familiar with our work, for many reasons.  Just a few:  you might learn something new; you might learn something that will modify an existing theory, thereby making it better; at the least, it forces you to defend your position and articulate your theory, which can only enhance your understanding.

So when I recently received the following comment in response to my post from Janaury 30, 2007, No Timesheets?  Is it Possible?, from Nile Mosley I responded immediately.  Even though our initial exchange is posted in the comments section to that post, I am reprinting it here so we can continue the debate in a fresh thread.  I’m also hoping others will chime in with their perspectives. 

After a further exchange with Nile, three things impressed me:  1) he owns a dog; 2) he mentions the Monty Python Argument Sketch; and 3) he has a PhD (I’m not sure in what, but I’m sure he’ll let us know).  As Benny Hill used to say, “Any man who dresses as a woman can’t be all bad.” So even though I disagree with the good Dr., vehemently, I like where this is heading, and I hope you join us.

Here is Nile’s initial email:

Hi,

Interesting articles on trashing timesheets. However, it is possible to remove the necessity for time sheets simply by using an intelligent business timing software like MetriQ. This software will still record every second of your time, and is fully automated—the computer does all the work for you, while you and your staff work as normal. We already know that keeping time-sheets can cost thousands of dollars a year simply from filling them in, not to mention lost time through interruptions, forgetting to write the time down, rounding errors etc. From a historical perspective, time-sheets had their place, but we should also re that ‘modern’ time-sheet software is simply a digital version of an old pen-and-paper technology with none of the salient disadvantages concerned with this now dated method of time tracking being suitably addressed.

As for the question—is there a need to know how much time staff spend on a job? Absolutely—and not just for those that bill by the hour. A number of our clients track time so they can ascertain exactly how much time went into different aspects of a job. For example, a web design company will track how long it takes to create new images, edit old images—how long to use ‘Components off the Shelf’ or to define their own in-house functionality, how long to create new web pages etc. and so forth. This treasure trove of valuable timing data is then used with Case Based Reasoning, Regression Trees and Bayesian Networks to help the web company predict how much the next job will cost, allowing for a more accurate bid on client tenders, giving the company a clear market advantage.

In essence and to paraphrase Ben Franklin—’Lost time is lost money’—and if you don’t know exactly to the nearest second where your time is going, then you’ve lost this non-renewable resource for good.

Cheers Nile.

Here’s my reply:

Hi Nile,

Nice try, but you are starting from two false premises.  The first:  time equates to value, which it cleary does not.  This is Karl Marx’s labor theory of value, which was repudiated by the margin revolution in 1871.

The second false premise:  the only way to perform accurate cost accounting is by tracking every minute of one’s day.  This is patently absurd, as most industries don’t use timesheets.  Toyota doesn’t even have a standard cost accounting system.  There are other ways to perform cost accounting, and time is not the only one.

Your quote from Ben Franklin is also incorrect, as it dealt with opportunity cost, not cost accounting, and certainly not the value of one’s output.  Nor is time a resource.  It’s just time, so what?  Do you think Bill Gates tracks his every minute?

I’ve written about every one of these fallacies in all of my books in great detail, so I won’t repeat them in this short response.

I will ask you this:  if you are so sure that timesheets are necessary, then how do you explain the hundreds of professional knowledge firms that don’t keep them?  They are not suffering profit losses, or any of the other deleterious effects you intimate would occur in their absence.  In fact, they are among the best pricers and most profitable firms we know of.  Not to mention the most innovative.

A little intellectual curiousity on your part would go a long way to f your erroneous premises.  Your theory has been falsified.  If I were you, that would scare the hell out of me.

Sincerely,

Ron

And Nile’s reply:

Hi Ron,

Well, thanks for your comments. Clearly we are in dispute about the benefits of collecting time, and I would very much enjoy the process of debating this with you. However, we are a startup company with a new and innovative approach to the collection of the time metric, which as already stated DOES NOT use time sheets, and yet is still able to collect and log this valuable information statistic. What an industry/business does with this metric, be it for the purpose of prediction, or cost accounting is a different issue—however, my own time, can only be used sequentially. So if I debate with you without our discussion being on-line, so we can get feedback from your readers, then its just two people banging their heads together, each with their own agenda.

First there is little point to this as it can realize little it terms of outcome for us, and second, it uses time—just how much, well for this email, 5 minutes 23 seconds up to this point—which according to your own premise, is of little interest to a business. However, should our debate go online, if you can take the risk that I won’t blow your arguments out of the water, then I’m willing to put more of my time into the debate.

Somehow, I don’t think you’ll do this. 1) because you may think I’m goading you 2) because the quantized entity of time is the ONLY metric of value to business. It’s how every single market-place widget is costed, its how we run our lives—quite simply because each and every widget becomes a widget because of the man/woman ‘hours’ used to produce, grow or dig it out of the ground. But I’m back to debating...ooops, sorry, and I’m beginning to feel I’m trapped deep inside monty python’s argument sketch.

Finally, I ‘paraphrased’ Franklin, which is why you think the quote to be incorrect. If time = money, then by inverting both sides, it does actually follow that not time = not money, and in the same way, L*time = L*money (L = Lost).

I wish you well.

Cheers, Nile

And my reply:

Hi Nile,

You bet I will debate with you, or anyone else about the value of collecting time.  I have no fear you will blow my argument out of the water, since most businesses don’t collect this pointless statistic.

Moreover, there are PKFs on VeraSage (see Trailblazers section) that have trashed timesheets and have not looked back.  What about them?  I suppose you can ignore them, however, they are a black swan, since you either don’t know they exist, or believe they can’t exist.

Time is not the ONLY metric in business.  That’s absurd.  I wrote an entire book on Key Predictive Indicators, none of which are based on time.  Given that a business could collect statistics on literally millions of things, what they need to do is figure out what metrics have predictive value.  Time is not a theory, nor is tracking it.  Hence, it can’t be a leading KPI, by definition.

It’s simply not true that “every single market-place widget is costed” with time—like I said, Toyota doesn’t even have a standard costing system.  They don’t use timesheets.  I wonder if you think Picasso should have tracked time?  Would that help determine the value of his work?  Would it have helped him price better?  To ask the question is to answer it.

If you read my work first, I think you’d at least understand my argument.

I didn’t say you quoted Franklin incorrectly; I’m saying Franklin wasn’t saying time=money as much as he was explaining opportunity cost.  In two of my books, I quote the letter at length where Franklin writes this (it’s “Advice to a Young Tradesman"), and he’s positing the concept of opportunity cost, not value, or cost accounting.  Cost accounting doesn’t allocate profit, where the concept of opportunity cost does.

I also don’t think you’re goading, but I do believe your self-interest is in your product.  What I’m saying is your product is the buggy whip of the knowledge economy.  It’s already been proven by the hundreds of firms that don’t use timesheets.  This does not mean they don’t perform cost accounting, but it’s a question of WHEN THEY PERFORM COST ACCOUNTING.  For what good does it do to know your costs (to the penny or minute) if the customer doesn’t value your output?  This is why Toyota costs things BEFORE THEY MANUFACTURER THEM, NOT AFTER.  It’s an enormous difference, and one I’m not sure you understand given your comments.

Moreover, cost accounting deals with average unit costs, not marginal costs, and pricers need marginal cost information.  There are other ways to get this (Activity Based Costing is one).

I’ve debated thousands of people on this topic.  It’s not a matter of me right, you wrong.  It’s a matter of which theory better predicts creating value in a knowledge economy.  Accurate cost accounting does not equate to better skill at Value Pricing.  If it did, CPAs would be the best pricers in the world.  They aren’t.  They are among the worst.

I say let’s take this all on line and have it out.  I’ve written tons of words on this topic, though, and would only ask you read my work and refute the Black Swans that already exist without timesheets.  Your theory doesn’t explain them, and hence, it has already been falsified. 

Hardly a good start to “blowing my theory out of the water.”

Regards,

Ron

And Nile’s response:

Hi Ron,

Many thanks for your reply, and your argument reads well. Yes, by all means post my initial post and your reply. When online, if you are happy, I’ll post my response.

Until then, its 11:53 Sunday morning, and the dog is begging me for a walk. A pleasant day to you and your family.

Kind regads, Nile.

And just to “goad” Nile’s into responding, I’ll add another point of contention.  Time is not a resource!  It may be non-renewable—after all, we are mortals—but this hardly implies that time, in and of itself, is valuable.  It’s what we do with the time we have that creates value (or cost, or opportunity cost). 

Tracking the pasage of time, and allocating it to various activities is not useful without a theory.  Airlines certainly track the time airplanes fly so they know when to perform maintenance and overhauls, so it’s useful in this instance.  But that’s a theory—fly a Boeing 747 X hours and then you need to overhaul it to keep it safe. 

In contrast, tracking the time elapsed for how long a knowledge worker performs a job doesn’t say anything about the quality of her output, or its value.  I think Nile might say you could at least figure out the cost.  And I’d say, so what?  There are other ways to track, and ascertain, that cost. 

But I have an even more fundamental question.  Why would you need to know the cost at all?  A PKFs expenses are fixed, and what matters is yield, not cost allocation.

And Nile, Peter Byers, a fellow Kiwi, has mailed you a complimentary copy of my book, Measure What Matters to Customers, so you can see where I’m coming from.

I look forward to furthering this debate and your comments.

Sure enough, Nile responded with this rather lengthy post:

Hi Ron,

Indeed great stuff. You’ve kept to your word and posted my comments, thanks—hey and I look forward to your book. Not often I get press! Phd was in differential geometry and applied computational fluid dynamics—but that was a different life—long ago, forgotten like the wind.
As for my response—here it is (bit longer than I anticipated—brevity, as you can see, is not my forte. I too have enjoyed the debate, and yes, perhaps we will meet, as you seem to be both fair and not ‘completely blinkered’ *smile* like me *smile*.

The discussion is ‘should we trash time sheets?’ Ron has provided many thought provoking assertions as to why time sheets should be trashed. As a business that specializes in intelligent business timing, we are in complete agreement with this assertion, because we believe the same, that the use of time sheets are a waste of time, literally costing business thousands if not millions of dollars a year depending on the number of staff and the frequency the time sheets are filled in.

It’s for this and many other reasons associated with the problems this dated pen and paper technique (made digital), that we developed a software package that automatically collects every second of time that staff use their computer, without the use of timesheets, stopwatches etc. So with our software a business can tell ‘who’ spent ‘how long’ on ‘what’ and for ‘whom’, without ever being told. For example our software will show that yesterday Jane spent 3:24:15 working on a graphics package for Acme Inc. web page images. She also spent 1:43:27 for lunch, 0:23:18 going to the toilette and 2:18:43 using IExplorer. Jane neither filled in a time sheet nor did anything different from her daily working routine—ie there was no external time-cost to the collection of this metric.

How Jane’s boss accounts for her time, be he happy or otherwise is a different issue. What he does with the time information, will be up to his organization. Not having this time information, means that Jane’s boss can only have an approximate idea of his employee’s productivity, and what he’s paying her for. He cannot say, ‘right—heads up—we are spending too much time developing in-house images, its cheaper to outsource’, simply because he doesn’t have the raw data.

Knowing exactly how much an individual, and hence a body of people spend doing a task, gives a ‘starting point’ for assessing the worth of the task. It doesn’t assess the quality, value, durability or anything else—all it does is to give a baseline view of how long the task took, and because we are all finite beings we all have an inherent understanding that the longer it takes to do something, the more it will cost. And here’s why.

My wife wants to buy a shawl. In the shop there are two brands, one made from sheep’s wool, the other made from pashmina a rare and highly sort after hair that comes from a special breed of goat indigenous to the high altitudes of the Himalayan mountains. While in the shop the two shawls may look identical, they do not feel identical, nor are they of the same insulating quality or have the same thermal tog. In addition, the pashmina shawl is 100 times the cost of the sheep’s wool, and the central reason for this is because of the ‘time it takes men and women to collect the wool from these remote and hard to find goats. There is simply no way out of this dilemma. Each of the wool gathers are entwined in the barter system, their time collecting wool in exchange for monetary units, so they can feed their own families exchanging the barter currency, money, for some else’s time to for example, first plant and dig potatoes out of the ground. There is no issue here about the quality or durability of their collection techniques or deliverables—the wool gathers are paid only on the weight of wool they harvest.

In contrast, for sheep’s wool, where livestock are domesticated, harvesting and processing the wool for a single shawl can be say, done in one day by one person. For the pashmina perhaps it takes 10 people 10 days to gather the same quantity of pashmina. If we go on to assume that wool and pashmina gathers around the world are educated to the same level, and have similar social economic backgrounds and are in general paid the same amount of money for an hour of their time, then it follows that pashmina will be 100 times the cost of wool. What’s important here is to realize that the wool merchant is not paying for a fleece, but the time of his gathers. In the same way, when the wool is taken to market, the merchant pays for the time of the oil company to find, drill, pump, refine the otherwise free-to-who-can-ever-extract-it crude oil which powers his truck. On this basis I would argue that to serial thinking temporal beings such as ourselves, time is the only real thing of value—not ‘time in and of itself, but what we each do in the time we have. And if we don’t measure it, we cannot say that we don’t waste it.

Now to address some of your points directly.

>Moreover, there are PKFs on VeraSage (see Trailblazers section) that have trashed >timesheets and have not looked back.  What about them?  I suppose you can ignore >them, however, they are a black swan, since you either don’t know they exist, or believe >they can’t exist.

I read some of the examples in the Trailblazers section, in which for example, Fred McBreen states “I really like the approach that your team costs are broadly fixed and not tracking time allows us to focus on doing the job well.” This is exactly the point of MetriQ which records time accurately without user intervention, so there is no more time tracking per say. As for being billed 3 times the going rate to deliver a job with a guaranteed outcome, the ‘ticket price shock’ as you’ve called it, if Mr. McBreen had at his disposal raw and highly accurate time data for his staff, and an experienced eye for the duration of the job, then he would be in a much better position to give a value costing—given the staffing resources that he has. As it stands, I can only assume that the ‘ticket price shock’ has fat built in, to address the unforeseen. Initially great, but soon to wither on the vine, as soon as Fred’s competitors who ‘have’ collected accurate time data, giving them leverage to reduce the fat, and yet still guarantee value satisfaction for only twice the going rate. Empiricism rules!

>Time is not the ONLY metric in business.  That’s absurd.  I wrote an entire book on Key >Predictive Indicators, none of which are based on time.  Given that a business could >collect statistics on literally millions of things, what they need to do is figure out what >metrics have predictive value.  Time is not a theory, nor is tracking it.  Hence, it can’t be >a leading KPI, by definition.

If Secretary Joe touch types at 100 words a minute, while Secretary Anne types at just 10 words a minute, both to the same quality—and I have a 10k word book on tape that needs transcribing—then I would say that time is a KPI, as I can say it will take Joe 100 minutes to type the manuscript, and it will take Anne 10 times longer. If however, Joe and Anne and all the other typists in the world all type at 50 words a minute, then certainly time as a KPI can be dropped from the equation.

>It’s simply not true that “every single market-place widget is costed” with time; like I said, Toyota doesn’t even have a standard costing system.  They don’t use timesheets.  I wonder if you think Picasso should have tracked time?  Would that help determine the value of his work?  Would it have helped him price better?  To ask the question is to answer it.

Picasso—the principle reason his work is worth so much is because he’s dead—he has no more time to produce more. The value of his work is determined by many factors, but one of the most obvious is scarcity. If there were a 100 million original Picasso’s available in the world, his work would not and could not re the same monetary value as his current work. And of course there could never have been this many Picasso paintings because he didn’t have enough...time. Conversely, if Picasso painted one picture a week, his agent would know that next week, there would be a new painting to sell and the week after that...and so on. So the agent uses his knowledge of Picasso’s throughput to estimate the next job and he can only do this because he knows the time for each painting to be completed. As for the monetary value of each painting, well this may well change if Picasso was able to produce 1000 paintings a day.

>If you read my work first, I think you’d at least understand my argument. 
Indeed, and as I’ve said I believe you have some very important points, and agree completely with you about ‘time sheets’—but I would say in defence, that at the time of writing your books, you did not have access to a software package like MetriQ, which I hope changes the landscape somewhat.

>I also don’t think you’re gloating, but I do believe your self-interest is in your
>product.
Absolutely correct. The only reason I’m debating with you is because we have developed a software product that has not been seen before, and its cost effective to spend ‘time writing my point of view to get air-time on your web-site. I’ve been upfront about that from word one. If you’d said you would not publish my arguments, I would not have continued with the discourse, because it would, for me as a businessman, be a ‘waste of time’ relative to the goals and agenda I’m following—please, no disrespect to you Ron! My time is finite, and I need to direct it towards those mechanisms that (in the business sense) optimizes our chances of selling software.

>What I’m saying is your product is the buggy whip of the knowledge economy.
You’ve not seen nor used our product.

>It’s already been proven by the hundreds of firms that don’t use timesheets.
Our software obviously wasn’t around when the evidence to this assertion was presented. Now, I’m afraid, this would have to be re-visited, as we now present to industry the ability to collect accurate time metrics without using time sheets and importantly without costing time in the process of collection.

>This does not mean they don’t perform cost accounting, but it’s a question of WHEN >THEY PERFORM COST ACCOUNTING.
>For what good does it do to know your costs (to the penny or minute) if the customer >doesn’t value your output?
Agreed, but in the same breath, if we both compete for the same customer with the same product, and I know how I can make the same widget cheaper than you because I have the data that tells me its going to be more cost effective to outsource part of its manufacture, then I have a competitive edge over you, as I can sell the same quality product cheaper than you can.
We may not agree on the ‘rightness’ of this and we may also both agree that this is not how it ‘should’ be—but if you haven’t already guessed—I’m a pragmatist, I can only go with what is.

>This is why Toyota costs things BEFORE THEY MANUFACTURER THEM, NOT >AFTER.  It’s an enormous difference, and one I’m sure you understand given your >comments.
I’m afraid the likes of Toyata et al. would not exist today if it were not for the pioneering work in Time and Motion studies from F.W. Taylor, at Ford. If Toyota do not measure staff productivity on the assembly lines or in the design studios or where ever, then its not to say they have succeeded because of this, but rather, how much more they could have succeed if they had.

>I’ve debated thousands of people on this topic.  It’s not a matter of me right, you >wrong.  It’s a matter of which theory better predicts creating value in a knowledge >economy.
Agreed. But until we are all paid the same dollar for doing different jobs, then I don’t think its theoretical—I think rather it’s a mundane practicality.

Cheers,

Nile Mosley

CEO MetriQ Limited.

NIle,

Your response illustrates how complex fallacies can become when you use the wrong theory.  You are mired in Karl Marx’s Labor Theory of Value, and nothing illustrates this better than your wife’s shawl example and your views on the value of Picasso’s paintings because he’s dead.  I can’t even begin to correct your mistakes in your post.  I’ll give you a hint:  scarcity does not determine value, nor does death.  Otherwise, I suggest we kill ourselves right now and let our heirs sell this exchange.  I will direct you to two posts on this site which blow 95% of your reply out of the water.  Period.  No debate.

The Fundamental Economic Assumption

and

The Economics of Value.

If you can read these two posts and still subscribe to your theory, I give up.  I understand your PhD was a long time ago, long forgotten as you say.  The economics you took must have went with it.

Just a fair warning.  You are still wasting time getting published on this site, as no one who reads this Blog is a believer in timesheets.  They all operate under the Subjective Theory of Value, which obsoletes your views.

I would also suggest you look at what Best Buy, a large electronics chain in the USA, is doing with its ROWE program—Results-Only Work Environment.  This disproves your notion that managers must know employee efforts to determine productivity.  I say look at their results.  Efforts will be rewarded in heaven.

I stand by my assertion that your software is the buggywhip of the knowledge economy.  You’re right, I’ve not seen it or used it.  But I haven’t had boils either, and I’m sure I can live just fine without them.

As for Frederick Taylor, I, too, am a huge admirer of his work.  I detail his contributions in three of my books, one of which is on its way to you.  But you have to understand, Taylor wasn’t doing time-and-motion studies on knowledge workers; he was doing them on manual and service workers.  Knowledge workers are different.  Tracking their time is meaningless.  I can have a million dollar idea in the shower, and what’s your software going to do for me?  How will it help me determine value?  Merv Griffin wrote the theme song to Jeopardy in less than one minute in the 1960s, and has earned $80 million in royalties.  I promise you he didn’t know consider his time, nor did he care if it was 1 minute or 1 hour.

Let’s not add to this exchange until you’ve read the above posts and my book.  I also suggest Pricing on Purpose, as it spends many chapters detailing the difference between the labor theory of value and the subjective theory of value.  If it doesn’t change the way you see the world, there’s nothing else I can do.  I gave it my best shot.

And I’ll add one more item:  I, too, used to subscribe to your thinking.  It was the way I was taught as a CPA.  It wasn’t until I learned economics, and I mean the different theories of value, that I saw the world as it is, not the way I was erroneously taught it was.  There is nothing more practical than the correct theory.  So, I’m a pragmatist as well.  I repent every day for my mistaken views.  It’s one thing to be wrong.  It’s quite another to stay wrong.  That is unforgivable.

None of this diminishes, of course, the fun I’ve had debating you, and I still hope we can meet someday.

Senior Fellow Michelle Golden on blogging in Accounting Today

Ron Baker - 08/25/2007

I’ve always known VeraSage Senior Fellow Michelle Golden knows more about blogging than just about anyone in the professions, which is precisely why I sought her out to build VeraSage’s Web site (I’m also the only one stupid, or blind, enough to refer to Michelle as a “fellow").  She is the reason I became a convert to blogging, as I’ll admit I was initially skeptical about this medium, holding the view that most blogs are worth what you pay for them.

One of the traits I find most useful about blogs is they can be used to manage an individual’s or firm’s intellectual capital.  Blogs also force knowledge workers to write and read.  If you want to really know what you think of something, write about it.  It’s different than speaking or making a video, as it forces you to be logical, cogent and reasoned.  So all this chatter about blogs replacing books, I think, is nonsense.  Blogs and books are compliments, like hot dogs and mustard; not substitutes like coffee and tea.

Michelle’s expertise is on display in the recent issue of Accounting Today (Aug 20-Sept 9, 2007) in the article “Blogging for Dollars.”

Well worth reading.

PKF in Texas makes a (small) step towards becoming a PKF*

Ron Baker - 08/25/2007

* Don’t confuse PKF in Texas with PKF the way Ed Kless has defined it—that is, Professional Knowledge Firm.  Here’s why.

We see so much dysfunction in so many firms, it’s always great to see one do something right.  In the Aug 20-Sept 9, 2007 issue of Accounting Today, there’s a Special Report insert titled Tax Season 2007:  Gauging Results.  On page 18 is an article by Anjana Jackson, a manager in the Tax Department of Pannell Kerr Forster of Texas, P.C. (hereinafter PKF) titled “Reclaiming Tax Season.” It’s encouraging, an discouraging at the same time.

She states one of the firm’s core values is “People are the Key to our Future.” So far so good.  But this is what particularly caught my eye:

In 2007, we wanted to strengthen our commitment to provide our employees meaningful challenges in their career growth (a core value) and to progress toward a more consultative mindset.  We felt our largest barrier to achieving the success we desired was our client base.  In order to groom consultants and provide challenges for our employees, we examined the types of projects our clients asked us to perform, the time commitments, and the level of learning and career satisfaction associated with a client.

The result was an aggressive decision to “disengage” a number of clients that scored low in these areas.  This was a huge leap of faith.  The reduction of our existing client base represented almost 25 percent of our 2006 charge hours.  The impact of upgrading our client base was a reduced busy season workload of seven percent, while improving employee morale and increasing our net fees by 10 percent.

Hallelujah!  I wonder what took them so long to perform this analysis?  We have been preaching for over a decade that when it comes to customers, less is more.  Not only have I coined Baker’s Law—Bad customers drive out good customers—we at VeraSage also use the Adaptive Capacity Model, utilizing the metaphor of a Boeing 777 airplane for your firm.  This forces firms to strategically think about their capacity allocations among different value segments of customers, while always reserving capacity for its most valued customers (see article).

We see far too many firms that will actually add capacity for back-of-plane customers—that is, D and F customers (F, of course, standing for “friends and family").  No airline would think of doing this.  Once they sell a certain number of Priceline.com (i.e., cheap) seats, that’s it, they no longer will stuff the back of the plane.  This is why we call it the “adaptive capacity model” because firms can change—dynamically and strategically, in response to market demand—where they move the bulkheads in their airplanes.  Our colleague Paul O’Byrne loves making the point that if CPAs ran airlines, the second story on the Boeing 747 would be on the back of the plane.

So why do nearly all firms have too many customers?  We hear two major justifications, both of which are specious upon serious reflection.  First, we need this low level work to provide on-the-job training to our youngest team members.  Second, we make money on this work, it contributes to our overhead.

The first reason is absurd.  Today’s knowledge workers go through at least five years of college, are incredibly intelligent and motivated to learn.  Why give them uninspiring work?  Would CPAs make surgeons pierce ears?  The second reason is just as absurd.  Sure, we make money on this low-level work because we are knowledge firms, we make money on practically everything we do (unless we are horrendous pricers).  Surgeons could also open a kiosk in the mall and provide body piercing, and most likely they’d make money too.  It’s just not the best use of their talent and intellectual capital.

If a firm truly wants to develop its younger team members into a consultative mindset, rather than compliance drones, that should start from day one, not after they’ve performed some hazing ritual of doing crap works because the partners paid their dues and they’re going to make sure the youngsters pay theirs. 

And this is where I find the PKF article discouraging.  She still speaks of charge hours.  How can we create entrepreneurial CPAs if they are still being taught they sell time and have to account for every six minutes of their day?  There is such a disconnect here.  Team members need to be taught that what they are really selling is intellectual capital, so they will be incentivized to develop and contribute IC to the firm.  This focus on hours is holding these firms back from developing the kind of team member mentality they all say they want.  Why can’t they see this?  Is the elephant in the room invisible?

She also writes the old standby:  “We truly believe that our most valuable asset is the people who work for us...” People as assets (or resources), how demeaning and dehumanizing.  The beginning of wisdom is using the correct language.  When are firms going to start referring to their knowledge workers as human capital investors, or better yet, volunteers?

We live in a knowledge economy, but one would never know it studying the practices, procedures, language and leadership of nearly all firms.  They treat their people more like factory workers, providing them uninspiring work along with mediocre leadership.  Is it any wonder we have a talent crisis in the professions?  Today’s younger generations know they are knowledge workers, even if the firms that employ them do not.

PKF provides lunches and dinners and 20 minute chair massages during busy seasons.  All very well and good.  But until it realizes its people are knowledge workers I’m afraid all these efforts, while necessary, are hardly sufficient.  Until it escapes the shackles of The Old Practice Equation (leveraging hours and hourly rates) and embraces The New Practice Equation as defined on the top of this Web site, its destined to remain a Firm of the Past.

I applaud PKF’s efforts on customer deselection and recognition that it needs to provide challenging work to its knowledge workers.  I only wish it would follow that very reasoning to its logical conclusion and embrace The Firm of the Future.  Until then, we’ll have to look elsewhere for leadership and real, meaningful change in the profession.

Ask VeraSage:  The Anti-Reading List?

Ron Baker - 08/11/2007

In my post on enlightened leadership I said leaders are readers, and that if you’re not reading at least 50 books a year, why would I want to follow you?  After all, your mind is obviously closed off from exploring the world and expanding your horizons if you’re not an inveterate reader.  How else are we expected to learn new things?

After reading my post, Mark Bailey, one of our Trailblazer firms in Nevada, wrote me the following email:

Dear Ron,

I know you aren’t Oprah, but if you have a moment I’d really appreciate a reading list.  I read a great deal, but as one of my leaders I’m interested in what you read.  Especially reading that relates to the tenets of the firms of the future as you’ve described them.

I enjoyed your comments on enlightened leadership.

Mark

Thanks for the question Mark, I’ve been meaning to include more book reviews in my writings, and perhaps in the future we’ll have a corner dedicated to what Team VeraSage is currently reading.  Books are important to everyone of us, a great source of intellectual capital, not to mention inexpensive.  In a letter to James Madison dated September, 1821, Thomas Jefferson wrote the following:

Books constitute capital.  A library book lasts as long as a house, for hundreds of years.  It is not, then, an article of mere consumption but fairly of capital, and often in the case of professional men, setting out in life, it is their only capital.

Nassim Nicholas Taleb in his thought-provoking and challenging book, The Black Swan:  The Impact of the Highly Improbable, tells the story of the writer Umberto Eco, who possesses a library of over 30,000 books (mine, by comparison, is a little over 2,000).  He separates his visitors into two categories:  1) Those who, upon seeing his library, exclaim, “Wow!  Signore professore dottore Eco, what a library you have!  How many of these books have you read?” Taleb explains the next category this way:

And the others—a very small minority—who get the point that a private library is not an ego-boosting appendage but a research tool.  Read books are far less valuable than unread ones.  The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there.  You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly.  Indeed, the more you know, the larger the rows of unread books.  Let us call this collection of unread books an antilibrary.

...focusing on the known is a human bias that extends to our mental operations.  People don’t walk around with anti-resumes telling you what they have not studied or experienced...but it would be nice if they did.  ...Note that the Black Swan comes from our misunderstanding of the likelihood of surprises, those unread books, because we take what we know a little too seriously.

What a great explanation!  My antilibrary gets bigger every year, and hundreds of books are staring at me right now, unread, taunting me with the knowledge they contain that may change the course of my life.  My colleagues are also constantly reading and strongly suggesting books I should read, which I’ve learned to take seriously.  Dan Morris and I want to launch a course on the Top 100 books you should read, which we think would be fascinating.  So many books, so little time.

I have an extensive Bibliography in all of my books, and all but one book (The Firm of the Future) contains an extensive Suggested Reading list.  You can find other book reviews here, in our Resources section, sorted by topic.

In addtion, at the risk of imitating Oprah, I thought I’d share with Mark and everyone else a (partial) list of the books I’ve read in 2006, and 2007 (so far).  Since I wrote two books in 2006 (Pricing on Purpose and Measure What Matters to Customers), and one this year I just finished (Mind Over Matter), my reading tends to follow the topics I’m writing about.  Hence, you’ll see a lot of titles dealing with intellectual capital, pricing, knowledge workers, measurements, etc. 

Knowing that a list, in and of itself, would not be that valuable without some form of review, I’ve also put a number next to each book, on a scale of 1-6, defined as:

• [1]—Ignore it.

• [2]—Skim it, but only if you find a copy somewhere.

• [3]—Worthwhile read, but only if you’re highly interested in the topic and/or the author.

• [4]—Very good read, thought-provoking.

• [5]—Excellent read, highly recommended.

• **[6]**—Buy it now and put on top of your reading pile!  You’ll never look at the world the same again, I promise.  Don’t wait!
  

Keeping the above scale in mind, here’s my list from 2006:

• Selling The Dream:  Why Advertising is Good Business, John Hood [3]
• The Cult of Personality Testing, Annie Murphy Paul [4]
• Lovemarks:  The Future Beyond Brands, Kevin Roberts [3]
• How To Sell At Margins Higher Than Your Competitors, Lawrence L. Steinmetz, PhD [4]
• Corporate Canaries, Gary Sutton [2]
• Let Go To Grow:  Escaping the Commodity Trap, Linda S. Sanford [3]
• He:  An Irreverent Look at the American Male, Florence King [3]
• Half Time, Bob Buford [4]
• Return On Customer, Don Peppers and Martha Rogers, PhD [3]
• Dealing With Darwin, Geoffrey A. Moore [2]
• Chasing Daylight:  How My Forthcoming Death Transformed My Life, Eugene O’Kelly [5]
• Attention Deficit Democracy, James Bovard [3]
• Impostor, Bruce Bartlett [3]
• The Well-Timed Strategy, Peter Navarro [2]
• How the Catholic Church Built Western Civilization, Thomas E. Woods, Jr., PhD [4]
• The Mind of Bill James:  How a Complete Outsider Changed Baseball, Scott Gray [4]
• Getting America Right, Edwin Feulner [3]
• The Knowing-Doing Gap, Jeffrey Pfeffer [3]
• The Professors, David Horowitz [3]
• The Human Equation, Jeffrey Pfeffer [3]
• In Our Hands, Charles Murray [5]
• The Kite Runner, Khaled Hosseini [4]
• Hard Facts, Dangerous Half-Truths and Total Nonsense, Jeffrey Pfeffer [4]
• Latino Boom!, Chiqui Cartagena [3]
• Creators, Paul Johnson [4]
• Social Intelligence, Karl Albrecht [2]
• Trapped:  When Acting Ethically is Against the Law, John Hasnas [3]
• The Party of Death, Ramesh Ponnuru [4]
• Revolutionary Wealth, Alvin and Heidi Toffler [4]
• Myths, Lies, and Downright Stupidity, John Stossel [4]
• Managing Intellectual Capital in Practice, Goran Roos [3]
• The Ultimate Question, Fred Reichheld [3]
• The Knowledge Web, James Burke [2]
• The Intellect Industry, Mark C. Scott [2]
• White Guilt, Shelby Steele [4]
• Knowledge and the Wealth of Nations, David Warsh [4]
• The Production and Distribution of Knowledge in the United States, Fritz Machlup [2]
• Myself and Other More Important Matters, Charles Handy [5]
• Godless:  The Church of Liberalism, Ann Coulter [3]
• The Structure of Scientific Revolutions, Third Edition, Thomas S. Kuhn [3]
• The Hare and the Tortoise, John Kay [4]
• Smarter Pricing, Tony Cram [4]
• The New Organizational Wealth, Karl Erik Sveiby [4]
• The Sarbanes-Oxley Debacle, Henry N. Butler and Larry E. Ribstein [4]
• Abortion and the Conscience of the Nation, Ronald Reagan [3]
• Pyramids are Tombs, Joe Phelps [3]
• Screw It, Let’s Do It:  Lessons in Life, Richard Branson [3]
  
• Thou Shall Prosper, Rabbi Daniel Lapin **[6]**
• The Creative Economy:  How People Make Money From Ideas, John Howkins [4]
• Learning In Action, David A. Garvin [3]
• The Origin of Wealth, Eric Beinhocker [3]
• Information Markets, Robert W. Hahn and Paul C. Tetlock [3]
  
• Knowledge and Decisions, Thomas Sowell **[6]**
• Buried Treasure, Rabbi Daniel Lapin [4]
• Juicing the Orange, Pat Fallon and Fred Senn [3]
• The Long Tail, Chris Anderson [4]
• Managing Knowledge Workers, Frances Horibe [2]
• Working Knowledge, Thomas H. Davenport and Laurence Prusak [3]
• Not a Suicide Pact, Richard A. Posner [3]
• Corporate Memory, Annie Brooking [2]
  
• Abolishing Performance Appraisals, Tom Coens and Mary Jenkins **[6]**
• The New Economics, W. Edwards Deming [3]
• Lost Knowledge, David W. Delong [3]
• America Alone, Mark Steyn [4]
• How To Build and Manage a Family Law Practice, Mark A. Chinn [3]
• Your Life Your Legacy, Roger Hamilton [2]
• Econospinning, Gene Epstein [3]
• The Strategic Management of Intellectual Capital, David A. Klein [2]
• The Elegant Solution, Matthew E. May [4]
• Purpose:  The Starting Point of Great Companies, Nikos Mourkogiannis [5]
• Einstein in the Boardroom:  Moving Beyond IC To I-Stuff, Suzanne S. Harrison and Patrick H. Sullivan [4]
• More Than A Numbers Game:  A Brief History Of Accounting, Thomas A. King [4]
• Building Organizational Intelligence, Jay Liebowitz [2]
• Reaping the Benefits Of Knowledge, Jan Duffy [2]
• Deja Reviews:  Florence King All Over Again, Florence King [4]
• Just For Fun:  The Story of an Accidental Revolutionary, Linus Torvalds [4]
• Workforce Wake-Up Call: Your Workforce is Changing, Are You?, Robert P. Gandossy, et al. [3]
• The Corporate University Handbook, Mark Allen, Editor [3]
  
• The Seven-Day Weekend, Ricardo Semler **[6]**
• A Whole New Mind, Daniel H. Pink [4]
• On The Wealth of Nations, P.J. O’Rourke [4]
• The Economics of Knowledge, Dominique Foray [3]
• The President, the Pope, and the Prime Minister:  Three Who Changed the World, John O’Sullivan [4]
• The End of Commitment, Paul Hollander [3]
  

And here’s my list so far in 2007:

• Hope Is Not A Method, Gordon R. Sullivan and Michael V. Harper [3]
• The Theory of the Growth of the Firm, Edith Penrose [2]
• Mavericks At Work, William Taylor and Polly Labarre [4]
• The Definitive Drucker, Elizabeth Haas Edersheim [4]
• The Little Book of Plagiarism, Richard A. Posner [3]
• Ever Wonder Why?, Thomas Sowell [4]
• Mind Set!, John Naisbitt [3]
• The Big Three In Economics, Mark Skousen [4]
• The Enemy At Home, Dinesh D’Souza [4]
• Micromotives and Macro Behavior, Thomas C. Schelling [2]
• Milton Friedman:  A Biography, Lanny Ebenstein [3]
• Introctrination U., David Horwitz [3]
• Left Luggage, C. Northcote Parkinson [2]
• Boomsday, Christopher Buckley [3]
  
• The Halo Effect, Phil Rosenzweig **[6]**
• The Science Of Success, Charles G. Koch [4]
• The Soulful Science, Diane Coyle [3]
• The Politically Incorrect Guide to Capitalism, Robert P. Murphy, PhD [3]
  
• More Sex is Safer, Steven E. Landsburg **[6]**
• A Man of Letters, Thomas Sowell [5]
• Strictly Right, Linda Bridges and John R. Coyne, Jr. [3]
• Freedomnomics, John R. Lott, Jr., PhD [5]
• New Ideas from Dead CEOs, Todd G. Buchholz [4]
• Competing on Analytics, Thomas H. Davenport and Jeanne G. Harris [4]
• Five Minds for the Future, Howard Gardner [4]
  
• The Economic Naturalist, Robert H. Frank **[6]**
• A Conflict of Visions, Thomas Sowell **[6]**
• The Black Swan, Nassim Nicholas Taleb **[6]**
• Whatever You Think, Think The Opposite, Paul Arden [3]
• Bully Boy, Jim Powell [4]
• Ronald Reagan:  Fate, Freedom and the Making of History, John Patrick Diggins [3]
• What Were They Thinking?, Jeffrey Pfeffer [4]
• Monty Python and Philosophy, Gary L. Hardcastle and George A. Reisch, Eds. [3]
• A Failure of Nerve, Edwin H. Friedman [3]
• Human Instinct, Robert Winston [2]
• Mobilizing Minds, Lowell L. Bryan and Claudia I. Joyce [3]
  

Of course, if you want more context on why I graded any book the way I did, don’t hesitate to contact me.

I’d love to hear what you are reading, or have read, that changed your outlook, or your life.

Another Trailblazer:  Fred McBreen, Director, Base52 Chartered Management Accountants, UK

Ron Baker - 08/11/2007

On June 22 of this year I had the great pleasure of speaking on Value Pricing at the Chartered Institute of Management Accountants (CIMA) conference near Oxford in Great Britain.  VeraSage senior fellow Paul O’Byrne spoke at this conference in 2006 on the Firm of the Future.

I remember it well, because it was the first time I’ve ever fell down on stage.  I felt like an idiot, but who knows, maybe it was effective?  You never know.

Well, I received the kind of e-mail yesterday that we at VeraSage love.  It is why we do what we do, and it certainly creates an HSD—High Satisfaction Day.  Fred was kind enough to give me permission to reprint his email:

Dear Ron,

I went to the CIMA conference a few weeks ago in Oxford, England.

I really enjoyed your speech and have since read your book, The Firm of the Future.

I wanted to let you know that after some thought and discussion we have scrapped timesheets and are now ‘Value Pricing’ all new work. It is already having a significant impact! At first the team were uncomfortable with getting rid of timesheets but we have now stopped and I for one feel liberated. I really like the approach that your team costs are broadly fixed and not tracking time allows us to focus on doing the job well. We are also focusing much more on learning and sharing knowledge and I believe this will pay dividends in the longer run.

My first go at value pricing was a few days after the conference. I saw a new prospect who I knew from prior contact was a fine to work with but his tax affairs were in arrears and there were some other significant challenges. I knew that he wanted to work with us and that we could do a good job for him. Rather than my normal way of pricing on hours I tried the value route and came out with a price 3 to 4 times higher than normal. The prospect’s immediate reaction was the ‘ticket price shock’ you describe in your book. To put it mildly he was taken aback. The next day however he came back and said yes. We have been working with him for a month and have enough margin in the price to make sure we do an excellent job. So far it is going well, but we need to deliver as it is satisfaction guaranteed!

I have tried value pricing with other prospects since and some have said no but I have been glad not to take on the work at a budget price.

So I just wanted to say thank you. I read lots of books and talk to lots of people but I believe that Value Pricing and your Practice Equation is the way forward and will really step change our practice.

Thank you again and best of luck with spreading the word!

Kind regards

Fred McBreen

Director

Base52 Accountants

Congratulations Fred on beginning your journey to becoming a Firm of the Future. 

Please sign our Declaration of Independence.  I know your British—and it’s an obnoxious document for you to read, but you are certainly now part of a world-wide revolution.  Welcome!

The Billable Hour Must Die, by Scott Turow

Ron Baker - 08/11/2007

Best-selling author Scott Turow has an excellent article in the August, 2007 ABA Journal entitled:  “The Billable Hour Must Die:  It rewards inefficiency.  It makes clients suspicious.  And it may be unethical.”

Part of me wants to say, “Well, Duh!” Richard C. Reed, author of three seminal ABA books beginning in 1989 has been making some of the same points.  My book, Professional’s Guide to Value Pricing, took the argument further by not only tracing the billable hour back to its theoretical roots—Karl Marx’s Labor Theory of Value—but also questioning the ethics and morality of billing by the hour.

The problem with Scott’s article is he doesn’t have the vision or imagination to foresee an alternative to the billable hour (which is strange for a fiction writer), and in fact, he makes this spurious assertion:

Let me again make it clear that I am not calling for lawyers to band together to abandon hourly billing.  The antitrust division of the Justice Department would be likely to have something to say about that, and well it should.  But I am hoping that lawyers, especially litigators, will more often be bold enough to consider offering clients alternatives billing arrangements.  And I hope clients will be bold enough to accept them.

Scott is contradicting himself here.  If the billable hour is indeed unethical, why wouldn’t he want lawyers to move away from it en mass?  The Justice Department doesn’t legislate or regulate how a firm prices, and no one is calling for a cartel to be created, or for collusion among firms.  We are just calling for common sense pricing, similar to every other business on the planet (except those dumb enough to bill by the hour).

Scott claims it’s hard to devise an alternative to the billable hour, but this is absurd.  We have many alternatives, and they are adaptive and flexible.  He’s never heard of Change Orders, service guarantees, price guarantees, fixed prices, etc?

Scott cites ABA Model Rules 1.5 and 1.7 with respect to establishing fees and conflicts of interest, asking:  “When was the last time any of us actually and explicitly set forth the problems of this system for a client, the way we do with other conflicts?” Good question, as we all know the most pernicious effect of the billable hour is that is misaligns the interests of the client and the professional.

Scott even asks us to imagine saying this to a client:  “I want you to understand that I’m going to bill you on a basis in which the frank economic incentives favor prolonging rather than shortening the litigation for which you’ve hired me.” How refreshing would this honesty be?

For all the flaws in Scott’s article, I’m encouraged by it.  Perhaps someone of his fame can bring this issue out in the open and foster a healthy debate.  Even better, maybe his own firm will set an example and bury the billable hour.

In addition to the article, take a look at the comments beneath it.  Two are from David Giacalone (#2 and #5), which I responded to (#11).  I’ve debated David before and it’s just useless, so I won’t bother to continue here.  His economic ignorance is beyond comprehension, and I take offense at his assertion that profits and service are in conflict.  This is a zero-sum view of the world that one finds on the kindergarten playground, not a serious discussion of the economics of pricing and value.

The ABA has always been a leader in questioning the practice and ethics of the billable hour, far more than any other professional body.  I applaud its willingness to continue the debate.  I wouldn’t even mind if Scott signed our Declaration of Independence.

Ask VeraSage:  What is Enlightened Leadership?

Ron Baker - 08/09/2007

Interesting question from Greg Clowminzer over at zen coach, and very timely.

I am curious how people define Enlightened Leadership.

What is Enlightened Leadership?

Cheers,

Greg Clowminzer

I don’t feel the need to repeat homilies and clichés about the characteristics of a successful leader, such as:  Direction, trust, hope, vision, faith, being a servant, etc.

No doubt, these are all characteristics that are important, but I remain unconvinced they can be learned.  We know what it takes to produce top-rate doctors or lawyers, but no clue as to how to produce great leaders.  I’d like to tackle this question from the perspective of what I have experienced that great leaders all have in common.

I do this because my colleague, Dan Morris, and I recently taught a CPE course in Monterey California to a group of auditors.  We were amazed at how unaware this group was with respect to current controversies and criticisms of their own profession. 

Not one of them had heard of the books we mentioned, the initiatives being undertaken to reform the financial reporting model, or much else outside of their own realm.  It was the most intellectual uncurious group we’ve ever encountered.  Frankly, it was quite depressing.

Thankfully, most firm leaders we encounter are not at all like this.  Of course, most of the people we deal with at VeraSage are self-selected, bright, curious, and tend to be early adopters.  I’ve also noticed that they, as well as successful leaders, all have various traits in common.

I believe enlightened leaders:

• Are intellectually curious about the way the world works.
• Are voracious and inveterate readers.  Leaders are readers, period.  If you’re not reading at least 50 books per year, your mind is closed and your ability to inspire others is limited.  Why would I want to “follow” someone who isn’t constantly expanding their own mind?
• Leaders challenge the status quo, and don’t accept “that’s the way we’ve always done it” explanation so common in today’s PKFs.
• Are willing to take risks.  If I want safety, I’ll invest in T-Bills.  When it comes to business, profits comes from risks, not playing it safe.
• Take ideas seriously.  Ideas and knowledge rule the world, and they should be taken far more seriously than personalities, societal status, credentials, and other superficial traits.
• Take the time to think and reflect on their actions, two activities grossly underutilized by today’s professionals.
• Have followers.  If you can’t inspire others to find their own path, you have no business leading others.  If you want to lead, learn to follow, which means you need your own leader.  Hitler and Stalin didn’t have a leader they looked up to (draw your own conclusion).
• Don’t shy away from confrontations or controversy.  In fact, they seek it out.  Pioneers take the arrows.  There’s no books in Borders titled Great Moderates in History.
• Understand people should be understood and appraised based on what they believe, not what they know.  The Germans of the Third Reich might have been incredibly educated, but their actions were based on their belief system.
• Have faith in the future.  The leap is more important than the look, but there’s no way to leap without faith.  Professionals seem to lack faith—in themselves, in their leaders, in their ability to add value, and in their ability to adapt to current realities.
  

Consider the advice from the following two leaders in the CPA profession.  These gentlemen are quite successful, and probably have nice bank balances.  But they fail almost every one of the traits outlined above, especially the first four.

The first comes from the Managing Partner of a New York CPA firm.  When asked to share his thoughts on how to expand a firm’s business and stay focused he replied:

Administration should be done by administrators, not CPAs who could otherwise bill at professional rates. It is critically important for people in professional services to stay close to the client. To take a highly competent practitioner and, in effect, remove him or her from the marketplace sacrifices not only billable hours but also information about the firm’s performance that can come only from working directly with clients. The managing partner should be a strategic thinker who sets policy, creates a vision and discusses with other partners how best to adopt.

I wonder if you would apply this to General Electric?  As a shareholder, If you saw Jack Welch, as CEO, go down to the shed and help the mechanics build airplane engines, would that be a buy or sell signal?  Not to mention he still believes in the importance of billable hours, as if time is what creates value.  I don’t know how anyone with any level of intellectual curiosity can still believe in a theory that has been so discredited; but there you have it.

Another CPA firm leader gives this (mostly bad) advice from the March/April 2007 issue of California CPA in an article titled “The 4 ‘Cs’ to Success”:

• Success can be measured in many ways and, in public accounting, one of those measures is making partner.
• From the moment you are hired, begin thinking like a partner and team member.  ...get the task done—on time and on budget.
• Public accounting is all about time and billing.
• If you fail to record all your time, the person doing the job next time is at a disadvantage because the budget will be too low.
• And record your time daily. Don’t try to remember on Friday how long something took you to complete the previous Monday.  Inaccurate time records cheat you, the client and the firm.
• Remember that staff costs are the largest expense of any CPA firm.  You are part of a team and an expensive part of every project.  ...Be an efficient worker.
  

There is so much wrong with this I can’t even begin to rebut it.  But I’ll try, briefly, point-by-point:

• Less than one-third of today’s young professionals even want to be partners, so that simply can’t be the only criteria for success.  What do you do with this talent?  Up or out?
• Was Einstein on budget?  Who knows, or cares?  What about innovation, creativity, risk taking and interpersonal skills?  It’s simply not part of his 4 Cs’ to success.
• Really, all about time and billing?  Not service to others, creating value, leveraging intellectual capital, or being effective?  This is the same nonsense I was mistakenly taught in 1984.  Firm leaders haven’t altered their beliefs in over a generation!  That’s not what you’d call being intellectually curious.
• Budgets don’t create value, nor are they even good project management tools.  There are better methods, but this leader shows no curiosity, but rather let’s just keep doing SALY (Same As Last Year).  The future will always equal the past.
• Timesheets are the buggy whip of the knowledge economy, but they are paramount in this leader’s world view.
• Staff aren’t costs, they are human capital investors who represent 80% of this very firm’s ability to create wealth for its customers.  To communicate they are an expensive expense is demeaning.  I wonder if he’d want an efficient surgeon or an effective one?  Obviously he doesn’t understand the difference between a knowledge worker and a service/manual worker.  Who would want to work for this leader?  Count me out.
  

For all these reasons, and more, most professional knowledge firms don’t have enlightened leaders, they have drone managers who couldn’t lead a trail of ants to a picnic lunch.  They treat their people like union employees in the sweatshops of yore, with no understanding of how we now operate in an intellectual capital economy.  Little wonder PKFs are eating their young and having a hard time attracting and inspiring human capital investors.

Just look at what they believe.  Is there any doubt that beliefs are far more important than knowledge?  And these leaders never seem to challenge their belief system by taking risks and trying new things.

I don’t know if that answers your question, Greg, but at least it enabled me to vent.

I look forward to others weighing in on this question, since I believe it is a vitally important topic.  VeraSage fellow Chris Marston on his blog has two great posts that deal with leadership:  Law Firms are Over-Managed and Under-Led and How Powerful the Mirror!.

Institute of Practitioners in Advertising publish Tim Williams and Ron Baker

Ron Baker - 08/09/2007

I was privileged to give a presentation at the The Institute of Practitioners in Advertising publish (IPA) in London in June on Value Pricing. Specifically, I discussed the model Tim Williams and I have been working on, tentatively known as LIVE (Leading Indicators of Value).

Subsequently, the IPA published an article Tim and I wrote on LIVE. I’m happy to report that the advertising profession is making progress converting from cost-plus pricing to Value Pricing. Though we still have a long way to go, and the large agencies are just now beginning to show serious interest, there has been lots of discussion on this topic.

One of the differences between the advertising world and the accounting and legal world is the clients of agencies have an enormous influence on the process. And so far, clients are very interested in moving to a value compensation agreement with their agencies.

That said, the ultimate responsibility still rests with the agencies themselves to make the change. It is not the customer’s job to innovate pricing strategies, it’s the sellers.

We at VeraSage, under the leadership of Tim Williams, look forward to achieving a “tipping point” in the advertising sector of Professional Knowledge Firms, ridding it of the antiquated practice known as hourly billing and cost-plus pricing.

Killer KPIs - You Got That Right

Ed Kless - 08/02/2007

A recent article by Jeanne Urich on sandhill.com has really got me fired up and not in a good way. The article entitled Killer KPIs to Drive Your Services Business is fraught with flawed and lazy thinking. It is more spoon fed pabulum from consultants as we at VeraSage call it.

Some lowlights:

• “Seemingly overnight, Services have become quite respectable sources of revenue and margin.” Really, what insight! In 1992, when I first become an owner in a consulting company, we already made as much revenue and more margin on consulting. I am glad to know that 15 years later is has now at least become “respectable.”
• “Running a Professional Services business is very complex - and it’s a game which must be won with “singles and doubles”, not homeruns; so it is imperative to know which KPI’s are “essential”, what the right targets are for each KPI and how improvement of specific KPIs can improve the bottom line.” Sheer genius! And wrong! The message here is clear, don’t innovate, just track some numbers and everything will be alright.
• “The challenge is to continually capture new business, while ensuring projects are delivered with quality, to provide consultants the tools they need to deliver and grow their skills, while effectively running operations and ensuring revenue and cost are in alignment.” Oh now I get it, if only I had this advice sooner. You mean I have to ensure revenue and control costs. Ah ha! This is like saying to a basketball team, “In order to win, we need to play good defense and try to score more points than the other team.” Thanks, coach!

What is really troubling is that the article than goes on to describe in detail the KPIs that PSFs should track. All the traditional ones are there: revenue, margin, utilization, and resource planning. All of them are lagging and internally facing. Only one, customer satisfaction, is external and possibly predictive, however, the author does a great job of emasculating this by saying, “I recommend at least quarterly reviews of all projects with defined criteria for RED, AMBER and GREEN...”

Quarterly reviews of projects! Give me a break. How about measuring on time completion of tasks? Even better, publish them to the customer so they can see your performance. To borrow a line from Ron Baker, quarterly reviews of projects would be like timing your cookies with a smoke detector!

Killer KPIs is right, these KPIs will kill you!