Community Section -
Ed Kless - 09/29/2007
Last Sunday, the CBS Sunday Morning show featured a story on lists which struck a nerve with me.
Every management consultant these days has their lists — lists of what should be done, lists of what should not be done. For me, it is just too gimicky.
I am asked an a regular basis for the list of things to do to value price. I want to go on record as officially saying, “I don’t have the list!” By the way, neither does Ron Baker or any VeraSage fellow. Every organization is different and therefore the move to value pricing will require a unique approach in every case.
Sorry, if this causes you stress. If it does, click here.
Michelle Golden - 09/27/2007
Have you looked up the Big 4 on Urban Dictionary? (OMG) Warning: post contains extreme negativity which I absolutely do not condone.
Deloitte
“Deloitte" comes from the Greek denomination of “De” and “Loitte”. “De” translates directly to “miserable”, with “Loitte” translating to “pathetic human being.” Formerly known as Deloitte Touche Tohmatsu, the name was shortened to just “Deloitte” after it was discovered that “Touche” was a 3rd grade version of the word ass, and Tohmatsu was too difficult to say.
Members of the Deloitte firm are easy to spot. During the months of January through March, in preparation for hibernation, Deloitters typically put on between 5 and 65 pounds. Additionally, staffers can be seen aging as if they drank from the wrong Holy Grail during this period. The only members of Deloitte who seem to stay a consistent age are the partners, mostly because they drink and bath [sic] in the youth and souls of staff members.
Deloitte is also a microcasm for the problems of American society. The wealth gap is clearly seen in Deloitte, with partners driving Porsche’s, and staffers riding their new Dyno freestyle BMX’s in January. In addition, Deloitte partners have new HP Tablet laptops, with staffers performing audit work on Abacuses…
Ernst & Young
Similar to the other Big 4 accounting firms, is a form of slavery and injustices. Most people come here to work hundreds of hours per week, only to be paid substantially less than at Deloitte, KPMG, and PWC. They are so cheap with raises they would rather see everyone quit every year than try to pay in line with the other firms. Salaries average $5,000 to $8,000 less than the other Big 4 firms. And the tag line “quality in everything we do” does not apply to senior managers who are the darlings of the partners. It means they can be worthless and not work a hard day in their life while shitting on the seniors. Then once the problems ensue, they just blame the seniors to make it all better.
KPMG
The cruelest form of punishment known to mankind. Some states are considering the use of KPMG as an alternative to the lethal injection. KPMG offices are characterized by a complete and utter disregard one’s family, friends, and life in general.
Rare mutations of KPMG offices have a thing called Jump-start your weekend whereby staff are encouraged to begin their weekends at 3 pm on Friday afternoons during the summer months. Soon enough do they find out this fallacy applies only to admin’s and other hourly employees as they are constantly hounded by management that they are not meeting their chargeability goals…
pricewaterhousecoopers
An environment/hell, in which the term ‘work-life balance’ is used to convince bright, young professionals to accept jobs. Once on the other side, it becomes apprent very fast that it doesn’t exist, but the majority of employees stay, because the partners continue to say they are “working” to improve ‘work-life balance’.
One question: How long before they figure it out? Answer: NEVER. They will continue to use it as a topic of positive discussion for the future (always in the future).
All of the Big 4 firms most highly rated (by readers) definitions are the same:
The last form of slavery in the US. This is where many young people begin careers and work 115 hours a week until they either quit or die from exhaustion. Former [insert firm here] employees often have scarred backs from the whip marks.
All I can say is that these definitions look to be written by employees who are spending too much time on the Internet and wasting perfectly good chargable hours!
Ed Kless - 09/27/2007
Over the past month I have been involved in a number of debates both on and off the web regarding how “realistic” both value pricing and trashing the timesheet are.
The mantra of the skeptics is this — “Yeah, but in the real world...” This comment both amuses and offends me. It implies that all the work that we have done with firms worldwide are not in the real world. Are we on Mars?
Anyway, the last I checked Knoxville, TN was in the real world. (Skeptics, please correct me if I am wrong.) In Knoxville, Aries Technology Group, LLC has transformed their organization. Please read their real world story.
Skeptics, in order to save you time when commenting on this post, please choose from the following list of next excuses:
- a) Knoxville is a small market and our firm is in a larger one where this would not work.
- b) Knoxville is in a big market and our firm is in a small tight knit market where this would not work.
- c) Aries is a technology firm, we are an accounting/legal/advertising/enginneering/architectual/consulting/marketing firm where this would not work.
- d) I see how they could do it for current customers, but my new customers expect to be billed by the hour and…
- e) I see how they could do it for new customers, but my current customers expect to be billed by the hour and…
- f) Aries is a smaller company than us, we are bigger, so this would not work.
- g) Aries is a larger company than us, we are smaller, so this would not work.
- h) None of the above, but I have my own unique situation. You don’t understand that...
Ron Baker - 09/24/2007
In May of 2006, I was privileged to conduct a Value Pricing Boot Camp with Ed Kless and Rob Johnson of Sage, at its annual Insights conference in Nashville, TN.
One never knows the impact you have on any participant, unless they go back to their firms and change their behavior. All we can do in a seminar is work on changing attitudes and theories, but the real test is will that lead to changing behavior.
This makes the following email Ed, Rob and I received from John Shaver today even more sweet. Another HSD—High Satisfaction Day—for VeraSage and Sage.
Ed,
I would say that you, Ron and Rob have made a definitive difference in our business. We reached the point in doing business by the traditional means (discounting, billing time, etc.) that we were really looking for a fresh and rewarding approach. The value pricing boot camp at the Nashville Insights was instrumental in opening our eyes to a very new way of doing business (I know Ron says these ideas are not new in reference to Peter Drucker but new to us!).
You guys provided us with the tools to inject new life into the business. Even a burned out old veteran like myself is now excited again about moving our business forward.
What’s most exciting to see is the way all of our team members have totally embraced the value pricing approach and how much they love not keeping up with timesheets. When we first brought them on board they told us we were crazy for not sticking with the traditional rules of consulting. Now they can’t imagine working any other way!
Thanks!
John F Shaver
Aries Technology Group LLC
phone: (865) 342-4300 x23 or (800) 990-6646
e-mail:
web: http://www.ariestech.com
Congratulations to John and the entire Team at Aries Technology Group for being one of the early adapters in their profession, inevitably blazing the trail for the rest to follow.
Ron Baker - 09/24/2007
I’d like to thank Mark Bailey for sending me this. I don’t know who wrote it, so the attribution will have to be “anonymous.”
Start with a cage containing five monkeys. Inside the cage, hang a banana on a string and place a set of stairs under it. Before long, a monkey will go to the stairs and start to climb towards the banana. As soon as he touches the stairs, spray all of the other monkeys with cold water.
After a while, another monkey makes an attempt with the same result all the other monkeys are sprayed with cold water. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.
Now, put away the cold water. Remove one monkey from the cage and replace it with a new one. The new monkey sees the banana and wants to climb the stairs. To his surprise and horror, all of the other monkeys attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.
Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm! Likewise, replace a third original monkey with a new one, then a fourth, then the fifth. Every time the newest monkey takes to the stairs, he is attacked.
Most of the monkeys that are beating him have no idea why they were not permitted to climb the stairs or why they are participating in the beating of the newest monkey.
After replacing all the original monkeys, none of the remaining monkeys have ever been sprayed with cold water. Nevertheless, no monkey ever again approaches the stairs to try for the banana. Why not? Because as far as they know that’s the way it’s always been done around here.
And that, my friends, is how professional knowledge firms began doing timesheets.
Ron Baker - 09/23/2007
In the September 24, 2007 issue of Accounting Today, Gary Boomer, noted consultant to CPAs, has an interesting article, “Firms may not have broken the $100-per-hour barrier.” Because this link is to the on-line version of the article, it does not include the tables.
Interestingly, the Boomer Survey found the following:
Firms broke the $100-an-hour barrier for the second time in the past five years (2002-06).
This calculation is based on revenue per full-time equivalent (FTE), defined as 2,080 hours. The Survey found that 2006 revenue per FTE increased 8.5 percent to $141,165, while the average hourly rate went from $125 to $136 in the same period.
The percent chargeable remained constant at around 50 percent. (This includes all personnel in the firm).
The investment in technology, as a percentage of revenue has declined.
Firms spent $7.54 per hour on technology. If this amount had been spent on labor, rather than technology, firms would have marked it up anywhere from 3.5 to 5 times and passed it on to the customers.
My response to all of this is: So what? I don’t dispute Gary’s claim that “Too many firms view technology as overhead, rather than as a strategic asset.” Unfortunately, I think far too many firms have this view about their talent.
I learned from Mark Koziel, who works for the AICPA, that based on the PCPS MAP Survey, the average firm spends .8% of gross revenue on continuing professional education, approximately equal to what they spend on broadband Internet. This is an appalling statistic.
As important as technology is, human capital is where the real wealth-creating potential of a firm resides, roughly 80%, according to economists and the World Bank. It’s obvious that firms are under-investing in this most vital capital.
Nonetheless, put aside the fact that the Boomer (and AICPA) Surveys are not random, hence are not scientific, which makes it very dangerous to draw any definitive—let alone useful—conclusions. Here’s the major problem: the metrics all of these surveys look at are completely irrelevant for a Professional Knowledge Firm (PKF).
I wonder why one doesn’t read of Microsoft’s, Oracle’s, or any other technology company’s investment per hour? Could it be that these companies don’t think they are selling time? These companies do look at revenue per FTE, but that’s it.
They don’t go to the next absurd step of dividing that number by hours. We might just as well divide revenue per FTE by the number of square footage in the firm. Either one is meaningless.
PKFs don’t sell time! One wonders how many times this must be proven before the consultants realize this basic fact? All of the metrics reported in the article are lagging indicators of performance. They measure the effect, but ignore the cause of firm performance.
Gary suggests firms calculate their metrics and then compare them to their peers. But this navel gazing is of little value, and I would argue a waste of precious intellectual capital.
One does not change one’s weight by weighing themselves more frequently, accurately, or comparing themselves to their peers. You have to change the process, not the measurement. Want a better golf score? Change your swing, and don’t bother with your peer’s scorecard.
The entire edifice of billable hours, charge hours, multiples, etc., are precisely the wrong metrics to assess the effectiveness of a PKF. If firms really want to enhance their performance, they should reevaluate their pricing strategies, not bother with silly hourly calculations.
And on this topic, I give Gary two cheers for advocating fixed price agreements (FPAs) and change orders. He even writes how his mind has changed on this issue, stating:
Years ago, I recommended that firms utilize a technology surcharge. Today, I recommend that firms move to tighter fixed-price agreements with a well-defined scope, money in advance and payment during the life of the project. Change orders should be implemented before work outside the engagement letter is completed.
Many accountants do not like this approach, as they have been trained to be fire fighters, go back to the fire house and then attempt to bill an additional amount. The client always wins in this type of negotiation. It will require communications and negotiations to use a fixed-price agreement and change orders, but the power remains with the firm if they get a signed change order prior to completing the work.
You have a simple choice: Let the clients dictate the rules and control the fees, or put the firm in a position of strength and increase margins. The construction industry has used this approach for years. Clients value fixed-price agreements, as they perceive the agreement as reducing their risk. Billing by the hour is perceived by clients as an open checkbook approach without an incentive for efficiency.
Hallelujah!
I remember, vividly, the days when a lot of consultants would advise firms to put a technology surcharge on their customers’ invoices. It drove me crazy. Any good pricer knows not to focus customers on things they don’t value. No customer cares about a firm’s internal technology investments.
How would you feel if your airline assessed a surcharge for using AutoLand, or computerized navigation? It’s absurd, yet some consultants still recommend this tactic. With advice like that, we don’t need consultants.
Besides the useless metrics, here’s another major problem with Gary’s article. He states:
A majority of partners who price engagements often don’t know the amount of the technology investment. They tend to underprice engagements.
I agree that the majority of partners who price tend to underprice. No doubt. But it’s not because they don’t know their technology investment, or even their costs. All PKFs, especially CPA firms, know their costs to the penny.
That’s because an overwhelming majority of those costs are fixed in the short-to-medium term. Any college intern can calculate a firm’s costs accurately enough for purposes of pricing.
The real problem is the partners don’t understand—nor does the firm track—the value being created for the customer. Value drives price, not costs, another point that seems to be lost on the consultants.
Price-led costing works like this: Customer > Value > Price > Cost > Service
Notice the customer determines the value, and this sets the upper boundary on the price the firm is able to charge. Only then should the firm worry about its costs to provide the service at an acceptable profit.
This means firms are doing cost accounting, but they are doing it before they begin the service, not during or after (as with timesheets). Toyota is so good at this it doesn’t even have a standard cost accounting system. Toyota calls is target costing, and it will not build a car without first assessing value and price to the customer.
Hence, price drives cost, not the other way around. If all firms followed this simple value chain they would increase margins and wouldn’t have to worry about hourly rates, or what their peers were doing.
Since price is the number one driver of profitably in a PKF—nothing else even comes close, including increases in efficiency, cost-cutting, and rainmaking—it makes sense for firms to invest more intellectual capital into the pricing function, not better cost accounting or more comparisons with peers.
The deleterious effect of Gary’s advice is it keeps firm leaders mired in the mentality they sell time. They will never be able to effectively implement FPAs and Change Orders until they get a far better understanding of their value. This won’t happen until they stop worrying about hours and trash their timesheets.
That’s why Gary only deserves two cheers, not three. But they are two big cheers and I once again commend him for being a strong advocate for more strategic pricing among PKFs.
When will the other consultants make the connection and call for the elimination of both the billable hour and timesheets? Better still, when will firm leaders?
Webmaster - 09/21/2007
Webmaster note: This article was written by VeraSage Senior Fellow Tim Williams.
In the hustle and bustle of servicing demanding clients, many agency professionals have lost their bearings. They no longer distinguish between what is urgent and what is important; everything is urgent—or at least it appears to be.
Account executives spend their day in a reactive mode, waiting for the next e–mail or voice mail to tell them what to do. They often end their work day feeling that they kept up with their inbox but didn’t accomplish anything important. It’s no wonder that many talented people are simply leaving the agency business altogether, because they’re not getting the sense of achievement that is at the core of why professional people work in the first place.
What can be done to change this climate of reactivity and low professional satisfaction? The first step is realizing that as an agency leader or manager, your primary responsibility is to create the right conditions for your people to succeed. This includes:
Help your people understand that you are paying them for value created, not hours worked. If your people are held accountable for achieving important outcomes for the client rather than logging a specified number of hours on their timesheet, it has a big effect on how they spend their time.
Engage in professional development for all employees. Agencies are not professional service firms, they are professional knowledge firms. Unless your people are constantly learning, they are not providing the value clients are paying you for.
Provide a better orientation for new employees. Instead of assuming new people know the ropes, show them the ropes—not only your systems and approaches, but your beliefs and principles.
Teach your people to prioritize. Unless agency professionals act on what’s important rather than just react to what’s urgent, they will never achieve the sense of satisfaction they seek from their work experience. Here’s a useful way to think about time prioritization:
Which quadrant do most agency people go to first? Quadrant C, because it’s easy. But that’s not where they add value to client relationships, and it’s certainly not where they’ll find the most professional satisfaction.
You, as leader or manager, can be the catalyst for an important climate change in your agency. But you’ll have to lead by example, as all successful agency leaders do.
Ron Baker - 09/21/2007
The number one issue facing the accounting profession, according the all the Management of Accounting Practice (MAP) Surveys conducted for years, is retaining and attracting talent. All sorts of faddish ideas are tossed around by consultants to the profession to help ameliorate this issue, such as: understanding Gen X, Y, Z and how they are different from the Baby Boomers and prior generations; offering more attractive benefits; higher salaries; more educational opportunities; and of course the biggest fad of them all, work/life balance.
But I’ve come to believe that these are just all effects, not the root cause of the problem. I truly believe the root cause is that firms don’t understand that their people are knowledge workers. Oh, they might use the term human capital investors, or even knowledge workers, but do they really understand what that word means? It means this:
Knowledge workers, unlike manual or service workers, own the firm’s means of production in their heads.
In the old days, if I worked for Ford, Henry Ford owned the means of production, and I had to show up and work to the rhythm and cadence of his assembly line. Today, if I work for KPMG, I own the means of production in my head, and their offices are simply there to help me do my job. I don’t work to the cadence of an assembly line, but rather through a process of iteration and reiteration—a process of the mind.
I may even know more than my superior about the particular job I’m doing. Otherwise, why would they even need knowledge workers with high levels of expertise if their superiors could teach anyone everything? Further, I’m only going to invest my human capital—which is approximately 80% of the world’s wealth according to the World Bank—in a firm that pays a decent return on investment as well as attractive psychological rewards—room for growth, challenging work, great customers, life long learning.
Also, a knowledge workers’ value is not measured by the time they spend, but rather the value they create through ideas, innovation and creativity. Ideas are always and everywhere more valuable than their mere execution. I rather be the guy who designed the pyramids than one of the many who built them.
There’s much more to this knowledge worker paradigm, which is why I wrote my forthcoming book, Mind Over Matter. Peter Drucker coined this concept in 1959, it’s not exactly a new idea. But if you listen and watch how firms treat their talent, you’d never know this concept exists, especially in the accounting and legal professions.
Mark Bailey, one of our Trailblazer firms from Reno, Nevada, sent me an email the other day which illustrates how endemic the idea that people are simply service workers is, especially in the big firms:
Dear Ron,
Last week I was invited to participate in a roundtable discussion of problems facing Nevada accounting firms. The event was held in Las Vegas and sponsored by the Nevada business Journal. The participants included the managing partners of several larger Nevada firms, and of course members of the “Big 4"and other national firms. Given the first opportunity to speak, I expressed my opinion that attracting and retaining professional staff has become a crisis in recent years. This is a problem, we as a profession, have brought on by remaining steadfast to management principles that are not responsive to the needs of today’s young professionals. It has been compounded by the increased workload brought on as a result of Sarbanes-Oxley, both directly and indirectly. (In Nevada we’ve also adopted the 150 hour requirement for candidates to sit for the exam, which has served to further limit the work force).
In our firm we’ve attacked this problem aggressively, by attempting to create a work environment with a work/personal life balance. Everyone at the round table seemed to agree that this was the key, and several shared what they had done. One Big 4 managing partner said they’d resolved the problem by going to flex time. At that firm they can set their own hours, but they still have to meet the standard of 55 hours per week. I am hard pressed to see how that “improves” lifestyle, although I guess they are free to use those hours between 1 and 4 a.m to meet the quota. He said their retention was much better as well. Just as many people were leaving, but the feeling was that now more were coming back!
Great logic. “We may not be doing things right, but some other companies are doing even worse, so our staff will quit and come back.” Another managing partner said the way to attract and retain staff was to “pay more.” He apparently doesn’t read the AICPA surveys related to staff motivation and satisfaction, which allude to such things as being respected, trusted and having interesting and challenging work to do, over compensation. Another felt that it’s a generational problem, and “young people today just don’t have the same commitment and ethic us old guys did.” Even if that was the case, which it isn’t, are you going to address it or just tear your hair and throw your hands in the air? And still another seemed to believe it was just a local problem and the Nevada Society needed to advertise for employees in other states. Nobody gets it.
My advice. Get rid of the timesheet. Value Price. Reduce (or eliminate) overtime. By doing so you have the basis to create a healthy, trusting work environment that is reasonably balanced with the personal needs we all have. I did get some interest from two larger regional firms. Nothing from the “Titans” of our industry however.
In keeping with our philosophy of trusting our associates and team members, our next project is to implement a system to fill the needs left by “eliminating the annual performance evaluation.”
What was absolutely apparent to me, was that there is recognition that the billable hour culture is fatally flawed, and many practitioners are ready for change. I believe that given a mechanical system that fills the void, they will embrace Value Pricing. “If we build it, they will come.” And I think we’re very close in my firm to having it built.
Regards,
Mark Bailey
Mark understands that we at VeraSage have issues with work/life balance, and think it’s just a symptom. But he’s absolutely right when it comes to Value Pricing, dumping the timesheet, and eliminating the annual performance evaluation, another cancer in all firms that needs to be cut out. His firm is making incredible progress on all these fronts, and more.
But I don’t share Mark’s optimism that “if we build it, the big firms will come.” We have built it, and they remain impervious to outside ideas and influence. And that’s a huge problem, because most young professionals pass through the Big 4, and certainly the Top 100 firms, at some point in their career. They are being taught the same nonsense I was taught by KPMG in 1984: you sell time, and here’s a timesheet.
When is this going to stop? The AICPA, state societies, and other professional organizations are not to blame. Certainly, they perpetuate some of this nonsense, but it is up to the firms to innovate and try new things. But the large firms are hermetically sealed to creativity, new ways of doing things, or even an idea that dates back to 1959.
In a follow-up email, Mark made this cogent observation:
My experience is that our knowledge workers will find the equilibrium of work/life balance without sacrificing either if given the responsibility and trust to do so, and not micro managed as you point out. I absolutely agree. Micromanagement leads directly to an imbalance. Interestingly our biggest problem with eliminating timesheet was knowing when a particular associate was working more than we feel is healthy in the long term. It forces better communication since we don’t have that timesheet crutch.
Because “micro-management” is defined differently by those who are most guilty of it—because of course they don’t do it—I have a tendency to focus on the “symptoms,” e.g. work/life balance (the effect) rather than the cause, micromanagement. Pointing out the “symptoms” makes it harder for them to deny they are guilty. Regardless, you are correct. I try to reinforce with our knowledge workers that each of them is a “business.” Each day when they come in they “rent” their knowledge and experience to us, and they are responsible for providing maintaining and improving what we rent from them. It’s their responsibility to provide that product. Each evening when they leave, they take it with them. They are compensated what it’s worth, and if they make it more or less valuable, that’s entirely up to them. We of course support them in their efforts. I know this is simplistic, but I think it has communicated some very important philosophy. I’d welcome your criticism of this analogy.
Until we reach a critical mass of firms throughout the world that share Mark’s philosophy, young professionals won’t have any choice to pursue a career in a firm that treats them like real knowledge workers. I dream about putting leaders like Mark Bailey, Chris Marston, Brendon Harrex, among others from our Trailblazers, in a room with each CEO of the Top 100 and let them all do a pitch to a group of 100 young professionals about why they should work at their firm. As Lenin said [regarding emigration], “voting with your feet” is a tell-tale sign of your real values.
Perhaps then these leaders might wake up to an alternate reality—what we at VeraSage now refer to as a Black Swan—that to this day they either deny exists, or think it’s mainly on the fringe and hence too small to be important. Much like the Big 3 automakers thought about the Japanese in the 1970s, and they are still playing catch-up.
Yet VeraSage is a Black Swan, and so are all the Trailblazers out there. We are creating the future, and it is very disruptive. Eventually the big firms will have to acknowledge it, and then play catch-up.
I only hope I live long enough to see it.
Ron Baker - 09/16/2007
This question comes from Irina, an attorney who has been implementing Value Pricing over the past several months with success:
Dear Ron,
I have been implementing your value pricing strategies for several months now with great results. It works quite well for traditional estate planning and estate administration matters.
Recently, I added trust mediation as a high value add niche and wonder if you can offer guidance on value pricing strategies in this field crowded with hourly, half day and full day rates.
Variations I have considered are a percentage of trust value or estimated litigation savings converted to “fixed price plus TIP [To Insure Performance] clause, plus service guarantee” pricing agreements.
As always, I appreciate your forward thinking and your candor!
Best,
Irina
What I love about this question is Irina has already answered it herself, proving two main points about pricing. First, the more you do it, the better you get. It is an art, not a science. But it’s also a skill, and as with any skill, the more you do it and think about it, the better you get.
Second, it proves that pricers are the ultimate experimenters. I think Irina’s idea of of a percentage of trust value, or percentage of litigation savings converted to an FPA [Fixed Price Agreement], along with the TIP clause and the 100% money back guarantee are excellent scenarios to go test. I have no idea which one will work better, but I do know that trying them all out will help you discover the proper price. Just having a conversation with a potential client about the options will give you a good feel for which one will be perceived as higher value.
We see so many firms get hung up on “one best way” to price, and that’s folly. Just as there is no one best numerical price for all customers, there is no one best method at determining that price. It all depends on the customer’s perception of value.
With the permutations that Irina’s come up with, she has added many arrows to her pricing quiver. This will allow her to pull out the correct one—with the proper customer, tailored to their perception of value—in order to capture the value she creates.
Great thinking Irina. Experimnent on some customers and let us know the results. That’s the ultimate test, and the best way to Price on Purpose.
Ron Baker - 09/14/2007
Barry from Seattle, Washington e-mails us this very intriguing question:
Dear Ronald J. Baker and VeraSage,
As a fan of Pricing on Purpose—oh, what a book, my top pick of the year for classical schools—and having just ordered your new book, Measure What Matters to Customers, I wonder:
Would you elaborate on how Jim Collins advocates misguided measurement in Good to Great...and, more specifically, where your Measure What Matters… may improve upon/correct Good to Great and the Social Sectors (Collins’ follow-up accompanying monograph)?
I’m fascinated by how we establish and measure Value in the non-profit arena. Especially when nothing is “for sale” (at least in a monetary sense). Thanks for your consideration!
Yours for Value,
Barry
Seattle, WA
First, let me say thank you very much for your kind words on my book, I’m glad you enjoyed it. Seattle is one of my all-time favorite cities, and all of my books have been partially written up there—I find the Emerald city a very inspiring location to write.
What a great question, Barry. It’s one I have not given a lot of thought to in the context of the not-for-profit sector, but it’s obvious that value is just as important there as anywhere else. I have not read Collin’s follow-up monograph, but I have read his earlier works.
I do have problems with his work. For a useful critique of Collins’ work, see The Halo Effect, as well as the VeraSage review.
My main problem is with Collins’ “one metric mentality” for businesses to focus on. Here is what he writes in Good to Great, page 104-06:
[W]e did notice one particularly provocative form of economic insight that every good-to-great company attained, the notion of a single “economic denominator.” Think about it in terms of the following question: If you could pick one and only one ratio—profit per x (or, in the social sector, cash flow per x)—to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine? We learned that this single question leads to profound insight into the inner workings of an organization’s economics.
Walgreens switched its focus from profit per store to profit per customer visit. Convenient locations are expensive, but by increasing profit per customer visit, Walgreens was able to increase convenience (nine stores in a mile!) and simultaneously increase profitability across its entire system.
Gillette: profit per customer. Key insight: Shift from profit per division to profit per customer reflected the economic power of repeatable purchases (e.g., razor cartridges) times high profit per purchase (e.g., Mach3, not disposable razors).
So what would be the one metric for a professional knowledge firm, or a not-for-profit? I don’t know. Perhaps value created per unit of intellectual capital, but we do not yet have the tools and methodologies to measure this (though models do exist that try).
On the other hand, perhaps it is the wrong question. I side with management thinker Charles Handy. In a lecture to the Royal Society of Arts in London in 1996, he described “the fallacy of the single criterion”:
Trying to find one number that is the sum of everything is misguided. There is never any one number that will actually explain success in life and we are foolish ever to think that it might be there. Money certainly isn’t it. Businesses know very well that profit is not the only measure. Sensible organizations now have about 18 different numbers they look at. Nevertheless, the myth pervades our society that if you are profitable you are successful. Or if you’re in the public sector, then efficiency is what matters. But efficiency is not quite the same as effectiveness. You can have a very efficient hospital if you don’t take in very sick people or people who are not going to get better, like the old ones. So you push them outside. You’re efficient but you’re not terribly effective. Looking for the one number has corrupted our society.
Handy is right in one respect when it comes to the productivity of knowledge environments: the one criterion is not inputs based on cost or man-hours. That metric tells us nothing about how well a company is creating value. Maybe a more holistic, interdependent approach is needed, one where we strive to improve the means and enable the ends to take care of themselves.
In the non-profit world, perhaps Alvin Toffler’s theory of the Prosumer economy is a good approach for understanding value. In his recent book (now out in paperback), Revolutionary Wealth he explains this notion of the prosumer economy.
Toffler posits that the “visible economy” is approximately $50 trillion, but that there’s another $50 trillion in the “invisible economy.” This economy consists of people, or groups, who both produce and consume their own output—prosuming to use his word. When we bake a pie and eat it; use an ATM; write shareware; bake brownies for a fund raiser; and most importantly, have children. This invisible sector, according to Toffler, is the subsidy on which the entire money economy depends. Toffler offers the “potty test” to business audiences: how much is it worth to your company that your people are toilet trained. Interesting question. We at VeraSage call that social capital.
The non-profit sector is incredibly huge, and increasing every day due to the enormous wealth of our country (just think of Warren Buffett donating his fortune to the Bill and Melinda Gates Foundation). I do write about this in my forthcoming (November) book, Mind Over Matter, and I’ll continue to give your question more thought, Barry.
Till then, I’d be very interested in other people’s insights as well.
Ed Kless - 09/14/2007
May I express my thanks to the several of you who emailed me your concern regarding my “suspension” for HKT. The post is satire and as with all satire, especially that of Jonathan Swift, it has very serious underpinnings and I do not apologize in any way for posting it.
To spell it out plainly, the satire is that I was suspended from the VeraSage Institute for reading a book and increasing my knowledge. This is an absurd notion on its face because we are a think tank — learning new stuff is what we do! I must say that the dearth of professional’s (and many other business people’s) reading astounds me. I have begun asking my audiences whenever I speak about the number of books (business or otherwise) that they read. The vast majority of them read one to two a year!
Many of these people are leaders in their organizations. Do any of you want to be lead by people with the intellectual curiosity of a copepod?
In case you are curious, the post was parody of a story appearing in the New York Times last year on the suspension of New York Mets pitcher Guillermo Mota. To read satire at its best, take a look at Swift’s A Modest Proposal. This is to which I aspire, but alas, to which I cannot hold even the faintest of candles.
Ed Kless - 09/12/2007
Do you know a stellar consultant (yes, I think CPAs and attorneys count) who is under 30 years old? If so, why not nominate them for recognition by Consulting Magazine.
Ron Baker - 09/12/2007
The September 13, 2007 issue of Lawyers Weekly, from Australia, has an interesting article by Hugh Davies and David Meale entitled “Brave new model,” suggesting that since law firms can now incorporate this may lead to a “tipping point” of new business models.
The article suggests moving away from billable hours, equity partnership, and balancing rewards for contribution and retention. In other words, a more corporate model.
The reason this is an “Old” model, rather than a “Brave new model,” is because we have been advocating our new practice equation of Profitability = Intellectual Capital x Effectiveness x Value Price ever since I wrote The Firm of the Future, published in 2003, and my prior books dating back to 1998.
Nevertheless, this is advanced thinking, once again coming from down under. Time will tell if any of the firms have the vision and courage to enter the Brave New World—also known as the knowledge economy, a concept Peter Drucker wrote about in 1959. Hardly new. Hardly brave.
Ed Kless - 09/12/2007
Once again, timesheets are responsible for more trouble in the world.
Presidential candidate Fred Thompson is in the firing line of the drive-by media (a Limbaughism) for providing “advice to a colleague about one of his law firm’s new clients: The man representing the two Libyan intelligence officials charged in the terrorist bombing” of Pan Am Flight 103.
Where did they dig this up? You guessed it — his timesheet.
According to the New York Times, “Marc L. Fleischaker, confirmed that Mr. Thompson, who is now seeking the Republican presidential nomination, briefly provided Mr. Culver with advice about the suspects’ case, billing the firm for 3.3 hours of his time.”
Ed Kless - 09/12/2007
Michelle Horn from Bullfrog Solutions writes:
We are on board with selling value and losing timesheets but I have a concern.
Since we provide services, it is important to know what a service will take resource wise so that we can somewhat account for getting the project done. If we don’t keep time sheet, how will I know how long something takes today so that when we do it again in the future I have an idea of the resources required?
For instance, if we customize a piece of software to do some automated functions, I need to know that it takes a body some sort of time say 20 hours so that I don’t double book that person. I also would like to know in the future that a similar task takes 20 hours so that when I am pricing I have some semblance of what it will take.
Ron Baker has previously spoken about the three defenses of the timesheet: 1. pricing tool, 2. productivity measure, and 3. costing mechanism. The question you are asking Michelle is perhaps the fourth defense — resource requirement planning. In the resource planning usage timesheets from previous engagements are examined as a guide for future work. O, that this were actually being done! In most firms previous work is rarely consulted, but even if it were it still does not take innovation into account. It also assumes that the previous work was completed with the “right” amount of effort. Is that really true? How do you know? Will it be easier or harder the next time? Will the same person being doing the work?
These are all questions that relate to resource planning. At VeraSage we have never been opposed to resource planning, i.e., attempting to predict the duration and effort of a task. Resource planning is a critical element of project management, but you do not need timesheets to do it. In fact, resource planning is doing your timesheets in advance, which is exactly what we advocate. So, yes, Michelle, you need to plan resources accordingly and have systems in place that help you schedule and balance those resources, but note this is not a time keeping system. Your organization should plan and schedule resources, just not account for them afterwards.
Many of you will now claim, ok, be doesn’t that imply that I will now need to do a timesheet to see if I got it right? The answer is no. Once again, this is now the third defense, see Ron’s booklet entitled Trashing the Timesheet for more.
One last distinction that I hope you will find helpful is the difference between effort and duration as they relate to project management. Duration is the number of days or weeks that a project task will take to complete. It is the window of time in which the result must be achieved. Effort is the actual amount of work, usually expressed in resource hours. A task can have duration of 8 hours; however the effort could only be 15 minutes. Alternatively, a task with duration of 8 hours could also have 24 hours of effort. Project management is more about duration than effort, although both are important and certainly a customer only cares about duration.
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