VeraSage

Improving Auditor’s Reports

Dan Morris - 10/27/2007

Auditor’s reports are redundant and the same.  Consumers would benefit from customized and differentiated reports.

Congratulations to Senior Fellow, Peter Byers

Webmaster - 10/26/2007

VeraSage Institute is proud to announce that senior fellow Peter Byers was conferred Fellowship status by the New Zealand Institute of Chartered Accountants.

Fellowships are a high level awared conferred on members of the Institute who have demonstrated outstanding service to the accounting profession, or for service to the community.

Congratulations, Peter!

The nobility in being paid what you are worth

Ron Baker - 10/18/2007

I recently read this letter to the editor by Ralph Heath, President, Ovation Marketing, in the September 2007 issue of Advertising Age:

We were recently invited to participate in an agency search (for a Fortune 500 company) complete with a 20-page RFP. The potential client shared no information about the company or its marketing goals and went on in the RFP to ask for price quotes.  ...They also refused to tell us the value or scope of the work being awarded.  ...We respectfully declined to participate in this pitch.

Apparently, many of my competitors will offer price quotes and solutions without doing the necessary preparation. My grandfather, who was born in 1887, was fond of telling me ‘a man ought to know what he is worth.’

This made me think about a topic we ignore too much here at VeraSage, which is this:  You will never get paid more than you think you are worth.  After all, if you don’t think you’re worth a price premium, why would your customers?

I have written about Value Pricing and self-esteem in the past.  Even though I’ve come to have serious misgivings about the self-esteem movement, I do believe there is a causal relationship between self-respect and Value Pricing.  Dan Morris says pricing is about ego, and I believe this is correct.

Since my book, Professional’s Guide to Value Pricing, has been discontinued by CCH, I thought it might be useful to reprint the chapter entitled “Value Pricing and Self-Esteem.” We get so caught up in the mechanics of pricing for value that we sometimes lose sight of the fact that there is great nobility in being paid what you’re worth, which only happens if you believe you are worthy.  This was originally written in 1997, and published in July 1998.

A man had better overvalue than undervalue himself.  Mankind in general will take his own word for his own merit.  ...know your own value, whatever it may be, and act upon that principal; but take great care to let nobody discover that you do know your own value.  Whatever real merit you have, other people will discover; and people always magnify their own discoveries, as they lessen those of others.—Lord Chesterfield

The greatest danger is not that our aim is too high and we miss it but that our aim is too low and we reach it.—Michelangelo

I have been thinking about Value Pricing from a theoretical and practical point of view for almost a decade, but I never gave much thought to the psychological aspect of self-esteem from the professional’s perspective.  As I am an avid student of human behavior I cannot adequately account for my neglect of self-esteem and how it directly effects the pricing of a professional’s services.  Professionals tend to suffer more from write-downs than write-ups.  Why this is so has always puzzled me.

Allan Boress, Editor of the CPA Profitability Monthly Newsletter, provided what I thought was a fairly good explanation.  Boress says that CPA are “weenies” when it comes to pricing our services; here’s why:

• Not enough quality clients.

• The client doesn’t really want to deal with a CPA—tax compliance, for example.
  
  

• The client sees little value in what you do.

• The client beats us up because it’s a negotiation tactic.

• Fee arrangements are not discussed [up front].
  

These are all true and good explanations; however they don’t really get at the root of why professionals have been so reluctant to engage, wholeheartedly, in Value Pricing.  For the deeper reasons, I have come to believe we must look at self-esteem.  I first encountered this concept of lack of self-esteem effecting our prices from Timothy J. Beauchemin, a CPA, consultant, and Contributing Editor to the newsletter mentioned above.  Tim passed away in February 1997, but he left his fellow colleagues a wonderful legacy of writings through his contributions to the newsletter.

In the August 1996 issue, he wrote an article entitled, “No More Begging for Work:  Self Esteem Is the Key to a Better Practice.” This provided, in my opinion, a compelling answer as to why professionals are such “weenies” when it comes to pricing.  Here is a portion of what Tim wrote:

I see too much of what I call “begging” in our industry—begging for work (especially by under pricing) and then begging to get paid.  I have never really understood why this is, particularly when you consider the training, hard work, and risk that accountants go through.  The only explanation I can see is that accountants tend to have rather low self images, unfairly and unreasonably low, but low just the same.

Eureka!  I cannot recount the number of times that I’ve heard the comment from a participant in one of our seminars that they would “feel guilty” about charging a substantial multiple of their hourly rate.  They say this as if they are taking advantage of the customer.  At first, I was shocked by this attitude.  Why else would they attend a course like The Shift From Hourly Billing to Value Pricing if they did not want to increase their net incomes?  And how else did they expect to increase their net incomes without following David Maister’s aptly named Donkey Strategy (carrying a heavier load)?  Low self-esteem does go right to the heart of why professionals question the value of the service they provide.

Do we truly believe that the benchmark of our value is the hours we spend?  What about the years of experience that stand behind that 15 minute tax planning brainstorm that saves your customer thousands in taxes?  Is the value really one-quarter your hourly rate?

We are so imprisoned by the hourly billing method that it has affected our own concept of self-worth, and, in my opinion, has lowered our self-esteem.  Do you think other businesses “feel guilty” about pricing based upon value?  Do the airlines feel guilty about charging the first-class passenger four to ten times the cost of coach, even though it doesn’t cost that much more to fly them?  Does Cosmair feel guilty about charging seven times the cost of L’oréal cosmetics as it does for Lancôme, even though it’s essentially the same ingredients?  Does General Motors feel guilty about charging a premium price for Cadillac over an Oldsmobile, even though they are churned out of the same factory with minimal cost difference?

The lesson is vital, and it is this:  Before we can charge a premium price, we first have to believe, internally, that we are worth it.  If we don’t think we’re worth multiples of our hourly rate, our customers never will believe it either.

Nathaniel Branden defines self-esteem in The Six Pillars of Self-Esteem:

• Confidence in our ability to think, confidence in our ability to cope with the basic challenges of life; and

• Confidence in our right to be successful and happy, the feeling of being worthy, deserving, entitled to assert our needs and wants, achieve our values, and enjoy the fruits of our efforts.
  

This relates to the guilty feelings of professionals with respect to Value Pricing. 

Branden further points out:

[Self-esteem] is directly affected by how we act.  Causation flows in both directions.  There is a continuous feedback loop between our actions in the world and our self-esteem.  The level of our self-esteem influences how we act, and how we act influences the level of our self-esteem.

And please do not think your level of self-esteem is set, once and for all, in childhood.  It is not.  You can increase it, and you can decrease it as well.

Pause for a moment and think about how you act with your customers.  When they object to your price, what is your first reaction?  In the majority of cases, the first thing a professional will do is to cut the price, in the hopes of pleasing the customer.  Why?  Not only are we loss adverse, but we’re not convinced we are worth what we are quoting.  So rather than educating the customer as to the value we are providing, we capitulate and cut our price, which cuts the value of our service. 

Quoting a premium price, and sticking to it, takes a positive self-image and sense of self-worth, and, as Tim pointed out in his article, most professionals don’t possess either, for a multitude of reasons.  In the case of CPAs, for instance, Tim points out they tend to come from the middle-class and blue collar families; the profession deals with money, a useful skill if you come from a fairly poor background; the profession is relatively easy to enter compared to law and medicine and it doesn’t require an Ivy League school to get certified; the degree is quick to get compared to the other professions; the profession if fairly open in employment, with grades, not connections, being the primary determinate for getting hired; and it offers a good salary, even during the apprenticeship.

Most professionals take all customer complaints, defections, etc., personally.  After all, what we sell is ourselves, so it’s only natural for us to take negative feedback from our customers personally.  I’m not advocating that you detach yourself from your professional pride and sense of identity, but rather, that you understand your own role in determining your attitude and sense of self-worth.  All actions start as thoughts in your mind.

In his article, Tim told of the changes he and his partner implemented to get over their “inferiority complex.” They enhanced their office, bought a Mercedes, increased their prices to near the top of the market and told prospects “If you want the best, you have to pay for it.”

Probably the biggest change they made was to grade their existing clients A, B, C, D, and F, firing all of the F clients, including one that was a large portion of their revenue.  He recommended that you refer them to your competition.  Also, refer to your competition clients that don’t pay, who are rude to your team, and who are not managing their business in an ethical manner.  And, finally, he said:

Take any of your weak staff members who just aren’t cutting it, and send them to your competition.  Two things will soon happen.  First, the environment in your office will be so positive that the work will move quicker and the growth will come sooner as others are attracted to your wonderfully powerful firm karma.  Second, your competition will soon be having severe operational problems—making you look even better!  I’ve done all this.  I know it works.

By taking these bold—some might even say drastic—actions, your self-esteem is bound to increase.  By surrounding yourself with only A customers and excellent team members, you will begin to feel better about yourself and your firm.

Branden says ”Self-esteem is the reputation we acquire with ourselves.” That is profound.  Professionals are deeply concerned, and rightfully so, with our reputations:  They care what their customers think of them, of their firm, of their integrity.  But what about their reputations with themselves?  Most professionals were never taught even to ask the question.  According to Branden:

If low self-esteem correlates with resistance to change and clinging to the known and familiar then never in the history of the world has low self-esteem been as economically disadvantageous as it is today.  If high self-esteem correlates with comfort in managing change and in letting go of yesterday’s attachments, then high self-esteem confers a competitive edge.

It’s obvious that in today’s world, intellectual capital is the source of all wealth, even the Pope recognizes this fact in his encyclical.  And when the source of wealth shifts from matter to mind, then the mind becomes more important.  And all that a professional possesses is his or her human capital and that of their associates.  And if the mind is important, than self-esteem is critical, and will have a substantial impact on what price you can command in the marketplace.

When entertainment moguls Steven Spielberg, David Geffen, and Jeffrey Katzenberg formed DreamWorks SKG, they were willing to sell a one-third stake in their brand new company for $900 million.  It doesn’t take a CPA to calculate that these three valued their new venture at $2.7 billion.  That’s not bad for a startup with rented offices, copy machine leases and virtually no tangible capital.  Do you think they utilized cost-plus/hourly rate accounting in setting their value?

In my courses, I often hear objections to Value Pricing from professionals such as, “It won’t work in my market, it’s too competitive.” Or, “I practice in a small town, and my customers talk with one another.  I can’t engage in price discrimination without losing their trust and confidence in me.” These objections, and others, are known as the fallacy of the exception.  Even after presenting empirical evidence that practically all businesses price discriminate, some CPAs remain unconvinced that it would work for them.  When I hear they’re from a small town I ask them, “Do you pay less for a Mercedes Benz than someone, say, in San Francisco? 

If you possess high self-esteem, you will earn higher profits.  The correlation exists and is backed up by empirical evidence.  And it is also true that customers prefer to associate with successful professionals, an opinion on which I have changed my mind.  I always thought it would be bad business to show too much opulence in front of your customers—fancy car, nice home, furnishings, vacations, etc.  And though I realize that some customers may resent this—mankind hasn’t found a way to eliminate envy just yet—I truly believe that the majority of customers want their professionals to be successful because they want to be successful.  I’m not advocating conspicuous consumption in front of your customers, but only that you not feel guilty or ashamed of your success.

There is a wonderful story about Picasso told by Harry Beckwith in his book, Selling The Invisible.  I’ve heard a few different versions of this, so the story is probably apocryphal, but it makes an important point:

A woman was strolling along a street in Paris when she spotted Picasso sketching at a sidewalk cafe.  Not so thrilled that she could not be slightly presumptuous, the woman asked Picasso if he might sketch her, and charge accordingly.

Picasso obliged.  In just minutes, there she was:  an original Picasso.

“And what do I owe you?” she asked.

“Five thousand francs,” he answered.

“But it only took you three minutes,” she politely reminded him.

“No, Madam,” Picasso said.  “It took me all my life.”

Charge by the years, not the hour!

We at VeraSage aren’t known for our poetry, but here’s one of our favorites:

I bargained with Life for a penny,

And Life would pay no more,

However I begged at evening

When I counted my scanty store.

For Life is a just employer,

He gives you what you ask,

But once you have set the wages,

Why, you must bear the task.

I worked for a menial’s hire,

Only to learn, dismayed,

That any wage I had asked of Life,

Life would have willingly paid.

—Jessie B. Rittenhouse, “My Wage,” The Door of Dreams (1918)

The Fat Smoker Syndrome

Ron Baker - 10/18/2007

In the Introduction to David Maister’s latest book (available for pre-order now), The Fat Smoker Syndrome:  Keys to Success for Professionals and Professional Firms, he writes:  “Much of business, I believe, is about things that are obvious, but not easy.”

This reminded me of a line from Ronald Reagan’s speech from 1964, “A Time for Choosing,” which launched him on the national political scene.  Incidentally, I know it is one of Ed Kless’ favorite quotes:

They say the world has become too complex for simple answers.  They are wrong.  There are no easy answers, but there are simple answers.  We must have the courage to do what we know is morally right...You and I have a rendezvous with destiny.

Maister’s latest book is full of common sense and simple answers, along with much insight based on his vast experience working with Professional Knowledge Firms:

We know what to do, we know why we should do it and we know how to do it.  Yet we don’t change, most of us, as
individuals or as businesses.

[Y]ou can’t achieve a competitive differentiation through things you do “reasonably well, most of the time.”

The necessary outcome of strategic planning is not analytical insight but resolve.

I have been told more times than I care to remember that the reaction to one of my presentations has been “This all makes terrific sense, but there’s no way we’ll ever do these things around here.”

[On turning away business rather than accepting any customer simply because they have a checkbook and breathe], Maister says:  “Not only should you do that, but the only way you can achieve any strategic distinction is to do that.  Strategy is deciding whose business you are going to turn away.” [As my colleague Tim Williams likes to say, “A firm is defined by the customers it doesn’t have"].

The book also slaughters some sacred cows, my favorite being the scheduled performance appraisal process, which Maister says “are doomed to failure.” Amen.  For more on this, see the fantastic book, Abolishing Performance Appraisals:  Why They Backfire and What to do Instead, by Tom Coens and Mary Jenkins.

Of course, I have my disagreements with Maister (such as his contention that law firms are different, which defies the laws of economics, in my humble opinion).  That said, I always learn from him.  You will too.

“I’d Rather Sleep Under a Bridge Than Go Back to Timesheets”

Michelle Golden - 10/12/2007

VeraSage Fellow, Tim McKey (from Baton Rouge, LA) says, “I’d rather sleep under a bridge than go back to timesheets.” If that doesn’t convey how much of an improvement value pricing is, I don’t know what will. Make no mistake, though, Tim needn’t sleep under any bridge! His income isn’t exactly worse with a Value Pricing approach.

On Monday, Oct 22, in Las Vegas, meet and hear from Tim McKey and many others who have taken the path toward building a Firm of the Future (including me). Others present will include: Dan Morris (http://www.cpadudes.com) and Daryl Golemb from California firms; Peter Byers, Yan Zhu and Brendon Harrex (speaking) from New Zealand; and Chris Marston (also speaking) from Boston. In addition to Chris and Brendon’s presentations, you’ll have a chance to ask the rest of us, any questions you might have.

If you really are curious about “how” to break free of hourly billing, you need to be in Las Vegas.

At least 8 VeraSage Fellows/Founders (from Accounting & Law) and several employees of their Firms of the Future will be there. The night of the 21st and 22nd, many of us will be hanging out at a Rio lounge to talk with attendees.

It’s a rare opportunity to have a whole bunch of “converts” in one place. Do come! And pick our brains.

And spend the day at the Rio with VeraSage on Monday. Seriously, it’s only $129 (just to cover room & A/V costs).  Rio room nights Sun and Mon are only about $100.

Go here to sign up for Monday’s session:  https://www.onlineregistrationcenter.com/register.asp?m=187&c=53

Baker Still Influential … Seventh Year In A Row

Michelle Golden - 10/11/2007

Accounting Today has issued its 100 Most Influential People list and our very own Ron Baker made the cut. The write-up:

RONALD BAKER

Founder, VeraSage Institute

This value-pricing advocate continues his crusade against the billable hour and timesheets, helping firms capture more of the value they create.

Career Highlights: Founder, VeraSage Institute, 1998-present ... Instructor, California CPA Education Foundation, 1995-present ... Partner, Baker & Barnett CPAs, 1987-2003 ... Senior accountant, KPMG, 1984-1987.

Other Affiliations: California Society of CPAs ... AICPA Group of 100 ... Professional Pricing Society ... Author, Mind Over Matter (November 2007); Pricing on Purpose; Measure What Matters to Customers; Professional’s Guide to Value Pricing, 6th Edition; The Firm of the Future; Burying the Billable Hour; Trashing the Timesheet ... Editorial Advisory Board, Smart Pros; Principia (SIC).

Education: San Francisco State University, 1984, BS Acctg. ... Santa Rosa Junior College, 1982, AA.

Personal: Born 1962, Santa Rosa, Calif. ... Single.

Congrats, Ron. We would have voted for you, too (if we’d been asked...).

The Continuing Education of Gary Boomer

Ron Baker - 10/11/2007

On September 23, I wrote the post Two cheers for Gary Boomer, regarding Gary’s recurring column in Accounting Today where he advocated Value Pricing.  I only gave him two cheers because he still insists on denominating accounting firm metrics in hours, even though this is like using a ruler to measure your oven’s temperature.

Since accounting firms sell intellectual capital (IC), dividing by the number of hours is useless.  I will go even further.  It’s down right dangerous, because it keeps professionals mired in the mentality they sell time.  If you fill out a timesheet in 6-minute increments, day-in-and-day-out, how could you not believe that what you sell is time?

Well, Senior Fellow Michelle Golden took me to task for this post.  She says it’s unfair that I single out Gary and criticize him while ignoring most of the other consultants to the profession who still profess the nonsense of both the billable hour and timesheets.

It’s a valid point.

As far as I can tell, Gary has made the most progress, of all the CPA consultants, in understanding that accounting firms sell intellectual capital, should not price by the hour, and should offer Fixed Price Agreements and Change Orders.  He writes cogently about these topics.  He even seems to be coming around to trashing the timesheet, although I’m waiting for him to take a stand and say they are a cancer that need to be cut out of all PKFs.  Period.  No equivocations.  Better yet, Sign our Declaration of Independence.

Why don’t we take on the other consultants?  Well, I have.  I’ve debated just about everyone of them, to no avail.  Though most of them do advocate Value Pricing, they seem to be paranoid at the thought of advocating eliminating timesheets.  For some reason, they think this isn’t feasible, even though we have proved, conclusively, that it can be done.  I guess I get tired of wasting intellectual capital on people who are intellectually lazy and refuse to read books, or learn anything new.

Gary is different.  He has wrestled with this issue, as have I, for at least 15 years.  I admire that greatly.  We should wrestle with significant issues, especially when they challenge our firmly held beliefs of the way the world works.  My five books have been a mea culpa, refuting my CPA view of the world as one of cost, while having no concept of value.  It was a form of what is known as negative intellectual capital.

Gary’s recent article in the October 8-21, 2007 of Accounting Today is entitled “Pricing for Value,” and it documents his education on this topic.  He advocates intellectual capital, creating a Chief Value Officer position, and even discusses the concept of negative intellectual capital.

It’s an excellent article, a clarion call for firm leaders to recognize the imperatives of a knowledge economy.

It leaves me wondering why more of Boomer’s firms haven’t trashed timesheets.  If the objective is to leverage intellectual capital—and price it commensurate with value—firms must recognize the timesheet is one of the major obstacles to achieving this goal.

There is no doubt, based upon the empirical evidence:  The best pricers across all PKF sectors—from advertising agencies to IT firms—have one thing in common:  They don’t maintain timesheets.  I believe this is a causal relationship, not just correlative. 

Getting rid of timesheets is not the end in and of itself.  Becoming a PKF that prices for value is.  Eliminating timesheets is the means to the end.

He who says “A” must say “B.” If you want to price for value, you must dump timesheets.

That is where the education, not to mention logic, trail leads you.  Gary is almost there.

Kerma Partners Quarterly Interview with Ron Baker

Ron Baker - 10/11/2007

This past June, while I was in London, I received the following email from Friedrich Blase of Kerma Parnters, a boutique consulting firm for professional knowledge firms.

Ron:

On Amazon, I saw an announcement of your new book on IC to be published in November 2007 [Mind Over Matter]. That finally causes me to write this email that had been on my mind for a good while.

Your work has left a major impression on my colleagues’ minds and mine. We are a boutique consulting firm working with law and other professional services firms on their strategic and competitive issues. Despite our size, we work globally, mainly in North America and in Europe.

For the past two years, we have also been working on assessing the intellectual capital base of law and other professional services firms through collaboration with the originators of the IC Rating (www.intellectualcapital.se).

I am currently writing an article with their CEO on the case studies (which caused me to look for new books). At the initial meeting which involved one of the pioneers in IC, Leif Edvinsson, I argued for the case of IC in professional services and mentioned your and Paul Dunn’s book—The Firm of The Future. We have published a number of pieces on IC management in the law firm context, which you can find on our website, mostly as resources under my name.

Now, I am very keen to understand the focus of your upcoming book. It would no doubt have an influence on our article, which is ultimately going for submission at Harvard Business Review, where the editor, Thomas Stewart, is one of Leif’s early collaborators in the birth of understanding intellectual capital. If you are interested, I would be honored to review it prior to publication and thus allow it to influence our thinking even earlier than normally possible.

Furthermore, I am very interested to learn more about your work and the VeraSage Institute in general, and explore whether there are possibilities of collaboration between our organizations. As I am sure you travel frequently and I happen to be in California occasionally, we may even find the time to meet. I would greatly enjoy that.

Please let me know your thoughts and accept my thanks for your excellent work that has helped me and others become better.

Kind regards

Friedrich

Since then, I have had the great fortune of talking with Friedrich and his colleague, Michael Roch. They are quite enlightened when it comes to intellectual capital, Value Pricing, and the uselessness of timesheets, even though we may still have areas where we disagree.

Friedrich was kind enough to read my manuscript, Mind Over Matter, and offered many cogent comments, insights, and areas for further research. I will post these sometime in the future.

I was honored when they interviewed me for their firm’s publication, Kerma Partners Quarterly, 2007, Issue 3. You can download a pdf of the entire newsletter here.

There are a lot of thought-provoking articles in this newsletter that any leader of any type of PKF would be wise to read. I look forward to further collaborations between Kerma Partners and VeraSage, as we spread our intellectual capital over the landscape of the professions to improve posterity.

Congratulations Hugh Williams

Ron Baker - 10/09/2007

Congratulations to H M Williams Chartered Accountants for receiving the first ever award for the most innovative medium sized UK accountancy firm from the 2020 Group.

Senior partner Hugh Williams, author of Life Without Timesheets, accepted the award on behalf of the firm. Here is what Hugh wrote to me:

Dear Ron,

In case you have not heard, there has been a small break-through on this side of the pond.

Dear Chris [Frederiksen] and the rest of the wonderful team in the 2020 Group have kindly awarded our firm the prize for being “the most innovative medium-sized UK accountancy firm for 2007.” A great part of the citation emphasised how we had done away with timesheets and published our book Life without Timesheets (St Edwards Press Ltd).

Up until this moment the general view over here was that I (our firm) lived on a different planet and so, as you can imagine, this award means a huge amount to both me, as well as I hope to you and the rest of us who believe so wholeheartedly in Value Pricing and the need for this philosophy to be practiced everywhere.

As you know I do really still live on this planet but, right now, it’s difficult keeping my feet on the ground!

I hope and pray that this may prove to be a small milestone in our international quest.

Thanks for all your training!

Yours ever,

Hugh

See the official press release here.

Congratulations to Hugh and his Team for continuing to blaze the trail. I hope this means Chris Frederiksen is now an advocate of trashing timesheets?

Another Trailblazer:  Shepherd Law Group

Ron Baker - 10/08/2007

Congratulations to Jay Shepherd of the Shepherd Law Group for not only making the decision to transition to up-front pricing, but also for today’s front-page article in the Boston Globe:  “Beat the Clock:  A Boston law firm says no to billing by the hour, and its clients say they are pleased.”

Jay maintains a great blog, Gruntled Employees, and he has written quite a bit about the perils of the billable hour.

What I love about Jay’s approach, as the article makes clear, is his firm’s “refusing to take clients who insist on paying on an hourly basis.” Other insightful comments include:

Shepherd said the new system is also a moneymaker for his firm, which has revenue of less than $5 million a year, because it is attracting new and larger clients who have defected from firms that charge by the hour. He concedes the flat-fee model will be more difficult for larger firms to adopt since they base their annual budgets on the estimated number of hours their lawyers are expected to bill each year.

[Robert E.] Hirshon, the former ABA president, also acknowledges that the current system is entrenched in law firm culture. Many lawyers benefit handsomely from hourly billing, he noted, especially senior partners whose paychecks are fattened by hours logged by young associates. And some clients are wary of trying a new system, despite being dissatisfied with the existing one.

When asked if change across the profession is possible, Shepherd replied:  “Can it be done?” “Yes,” Shepherd said.  “Will it be done?  I think other firms will be dragged along kicking and screaming.”

How true.  But they will be dragged not by customers, but by other law firms who have adopted this more enlightened model and continue to attract customers and talent from the firms unwilling to face the realities of a knowledge economy.

I can’t say this enough:  pricing changes come from SELLERS, not BUYERS.  It’s up to law firms, not their customers, to make this change.  It simply won’t happen any other way.

Congratulations to the Shepherd Law Group for blazing the trail the rest of the law firms will inevitably follow.

Feedback on Measure What Matters to Customers:  Using Key Predictive Indicators

Ron Baker - 10/08/2007

Steve Orleow, Partner Develpment Manager with Sage Software in Australia, sent me this e-mail yesterday after reading Measure What Matters to Customers:  Using Key Predictive Indicators.  What’s interenting to me is Steve’s a Chartered Accountant, and this book is not particularly kind to the accounting/MBA way of thinking.  In fact, it’s a shot across the bow of both, because I think both disciplines are largely responsible for sucking the passion and entreprenuerial spirit out of corporate life.

Hi Ron,

I have just finished reading Measure what Matters to Customers which was a gift from Ed Kless when he was in Australia to share his knowledge with our Sage Resellers.

Your book is outstanding and should be required reading for any professional services courses. I am a Chartered Accountant and have been struggling for many years as I was taught to understand life by the numbers. I do not regret the education, it is extremely valuable but I have developed a strong instinct (gut) over many years and my training continued to force me to analyse and rationalize this instinct. This conservative ‘training’ is likely to have held me back from following the instinctual path. I have over the last few years, discovered that my instinct is more valuable than my ability to ‘account’ for issues.

However, your book provides a compelling case to trust your instinct and live by the “emotion’s of life” rather than the “analysed and intellectualized life.” I do not think that I am discarding the numbers, as they have real value, but I can now better understand their quantum of value in the entire process.

I have learned from other mentors that the greatest gift a person can pass on is one that allows the recipient to discover that they have greater potential than they previously thought and inspire them to reach higher. You have achieved that for me and I thank you for the gift.

I look forward to meeting you one day and hopefully contribute towards the thinking that you are part of.

Regards,

Steve Orleow

Partner Development Manager

Thank you, Steve.

I can’t even begin to tell you how much your email means to me.  One never knows how a book is going to be received, especially one like this that is such a mind-shift change.

I am a [recovering] CPA, so your journey resonates deeply with me.  I, too, thought the world revolved around numbers, and it was a hard slog to move away from that paradigm.  They still have their place, of course, but I worry that a lot of businesses only care about numbers and not customer experience, let alone value.

Not to self-promote, but as a CA you may be interested in my forthcoming book, Mind Over Matter.  I think you’d find more reason to doubt our prior lives.  I’ll get one to Ed for you.

Thank you, Steve.  I’m humbled beyond words, and hope I get to meet you in future.  I certainly have a tremendous amount of respect for your brilliant colleague.

Ron

Ad Agencies need new business model

Ron Baker - 10/07/2007

An excellent article in Advertising Age by Avi Dan, the former global executive director-new business development at Euro RSCG, and executive VP-new business director at Saatchi & Saatchi:  “Agencies Must Wake Up to a Different Business Model,” published September 24, 2007.  (You must register with the Web site to view the article).

Dan’s article discusses many changes and challenges agencies must face to revitalize their increasingly ossified business model, based on selling hours.  He discusses compensation, based on value, not costs; outsourcing; licensing and intellectual property revenue streams; the importance of speed; and social responsibility.

I will only discuss value-based compensation in this post.  I have grave reservations about his views on social responsibility, especially since it is such a nebulous concept and means different things to different people.  I totally agree with his views on intellectual property, and how important it is for agencies to own more of their own ideas.

Dan’s article starts by equating the agency business model to the 1993 Bill Murray film, Groundhog Day, wherein Murray is trapped in the endless loop of repeating the day over and over again.  Most humans learn from experience, but Dan is right—it seems most PKFs just keep mindlessly repeating the same mistakes and lost opportunities over and over, with no end in sight.

Here’s what he say with respect to compensation:

Take compensation:  Instead of compensating agencies fairly, based on their contribution to wealth creation for their clients, clients adopted labor as the metric for evaluating the contribution intellectual property has on wealth creation.  Yet most intellectual-property wealth creators, whether they are J.K. Rowling, Steven Spielberg, Damien Hirst or Georgio Armani, don’t fill time sheets and don’t get compensated based on how many hours they toll, but on the basis of the value that their artistry creates.

Why should agencies be different?  Why shouldn’t clients recognize that intellectual property [VeraSage would say Intellectual Capital, a much broader definition than just the legal term IP] is part of asset value and compensate agencies accordingly.

Amen.

But here’s my problem with Dan’s statement, reminiscent of what Elanor Roosevelt used to say:  “No one can make you feel inferior without your consent.” Where Dan believes clients and agencies need to adopt a fairer compensation model together, I put the onus on the agencies, not their customers.

Throughout history, sellers have nearly always changed pricing strategies, not buyers.  None of us asked the airlines, hotels, rental car companies, and retailers to switch from cost-plus (or break-even) pricing to yield management.  The sellers made these decisions, and implemented them, unilaterally.  Some industries moved all at once, as when the airlines were deregulated in the late 1970s and started moving towards yield management.  Others were shown the way by a few, brave thoughtful trailblazers.

Customers simply don’t sit around thinking about the pricing strategies of the businesses they patronize.  Agencies have the power to change the paradigm, as Crispin Porter, Anomaly and others attest.  I fault the agencies for being timid and lacking the faith to make this change.

Instead, like Dan’s article, they bemoan the existing compensation structure, but aren’t willing to do anything about it on their own.  It’s as if they are supplicants to their customers.  And by the way, their customers know that labor based compensation is unfair, rewards the wrong behavior, misaligns incentives, and wastes precious human capital on analyzing costs, efforts, activities at the expense of focusing on results, output and value. 

Customers aren’t stupid.  They’d never price their product and services based on labor time.  They want to change the method as well, but it is simply too hard in large customers to overcome the inertia.  This is why agencies must force them to change, or walk away from the business.

Sound tough?  It is.  Profits come from risk.  I can’t think of anyplace that’s worth going that’s easy.  And if everyone already understands the existing business model is broken, who’s going to change it?  My colleague Tim Williams and I firmly believe that the first agencies to completely abandon time-based pricing [and timesheets] will have an enormous advantage in the marketplace.  Sure, they may lose some clients, but we’d bet they’d gain many more for showing leadership and offering a viable value proposition that does the right thing.

Here’s my clarion call to ad agencies around the world:  we’ve diagnosed the problem, which is labor-based compensation.  We know where you need to go, which is value-based compensation based on the subjective theory of value.  We have examples of agencies that have successfully implemented these models, such as Crispin, Anomaly, etc.

So start experimenting.  Place one customer on a value-based compensation model.  Stick your toe in the water and build your confidence.  Pricing is an art, not a science.  But it’s also a skill, meaning the more you do it, the better you get. 

It’s not up to your customers.  It’s up to you.

I rarely agree with Elanor, but she’s right about this.

A BFO: Why Firms Should Really Trash the Beast

Dan Morris - 10/06/2007

We have demonstrated the traditional reasons and rationale for trashing the timesheets.  Understand the real benefits of trashing timesheeets is bigger than our Misssion.

Brendon Harrex Turning Southland On It’s Head

Webmaster - 10/05/2007

VeraSage Senior Fellow Brendon Harrex is profiled in a recent inspiring article. With the founding of the Harrex Group in Gore, New Zealand, he is certainly turning the Southland on its head. For those of you attending the Young CPE Program in Las Vegas, you will get to meet this extraordinary individual who is changing the world of accounting as we know it. And not a moment too soon!

Check out a pdf of the article.