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Ron Baker - 11/28/2007
After spending so much time refuting the conventional wisdom on pricing—that is, the theory that time spent equates to value—it’s comforting to hear how an excellent pricer has advanced the theory of value even more by experimenting with new strategies.
Senior Fellow Daryl Golemb has continued to astound me with his firm’s innovative pricing strategies. I met Daryl in 1996. He immediately embraced the ideas behind Total Quality Service and Value Pricing. He was one of the first firms to offer a menu price. Later on, he innovated the concept of the Perpetual Fixed Price Agreement [FPA], carving out the “evergreen” services that CPAs provide their customers annually—such as tax returns, tax planning, financial statements, etc.—while drafting an FPA that only focused on the customer’s changing wants.
Two years ago, at one of VeraSage’s Sole Proprietor Retreats, Daryl said something that blew my mind. I’m paraphrasing here:
Not only do I have a fixed amount of capacity in my firm, but I also have a fixed amount of emotional capacity. If I’m not being paid at least $5,000 for a new customer, it’s just not worth my emotional investment, and I will turn down the work.
I was stunned. I think it took me about six months to figure out exactly what he was saying, since it’s so multi-faceted. Part of it is, Daryl understands his value, and is not afraid to price for it. Another part is that high price tempts. Sure, we say that, but what the hell does it mean?
It means that establishing a high price, and sticking with it, conveys something about your value, not only to your customers, but to yourself. It’s a self-fulfilling prophecy, an ever-increasing upward spiral of value creation.
Well, Daryl has raised the bar again. In an e-mail from November 17th that generated an incredible HSD for me, here is what he wrote (he graciously gave me permission to reprint it in its entirety):
Good morning Ron!
Beginning with the Verasage conference, and continuing with the Sole Prop Retreat, I have been thinking about our current pricing for entering into a new relationship. Our previous amount was vague—more than $5,000 but less than or up to $7500. I came away from the conference believing that the amount needed to be firmly $10K. Now, this is not our fixed price target amount, but rather the floor for entering into a relationship.
The power of fixing the amount has been tremendous. Astoundingly, I have used this in conversations with new customers twice this week, and we are proceeding down the path with both customers of outlining the scope and price of our agreement. Our initial conversation set not only the table stake, but also the quality of the relationship we were seeking to have with our customers in a way that $5,000 didn’t do.
The first conversation was for an engagement for simple corporate and individual tax preparation. The price range this individual had in mind was $4500, which is somewhat higher than he is paying now ($3500 I think). Once I had an understanding of what he was looking for in us, I explained what I was looking for in deciding to take on a new customer. I think he was slightly shocked that the answer wasn’t automatically yes—that just because he was willing to buy meant that I was willing to sell. I explained that I have 25+ years experience in the profession, and that simple tax preparation didn’t do it for me anymore. I went on to say that I have a very clear understanding of the engagements that bring us professional satisfaction, and those that don’t. For everyone’s benefit, I do not take on engagements that don’t feel great.
We then had a conversation about business coaching, and the many possibilities that could spring from our conversations. At this point I learned that his parents were active shareholders in his corporation, and would really benefit from these services as well. They have an established relationship with a CPA, but always want more from him.
We came to a verbal fixed price agreement for $14,500, pending the approval of his parents, for the following services:
- Quarterly coaching meetings for the purpose of setting corporate goals
- Financial, tax and estate planning conversations with Mom and Dad as necessary to round out the relationship with their current CPA.
- Financial, tax and estate planning conversations with Frank and his wife as necessary.
- Unlimited telephone and email with their bookkeeper, who according to Frank, is extremely capable and will look for guidance on big picture planning for the corporation
- Corporate tax returns, and tax planning as necessary
- Personal tax returns for Frank, and tax planning as necessary
Under our previous relationship pricing, I most likely would have priced this agreement at $7,500 - $8,500. Raising the bar on the value of getting into a relationship with us, gave me the courage to ask for more.
I can’t wait to get started with Frank. I’m hoping to have our first meeting the week after Thanksgiving. It feels good to look forward to working with a customer, instead of dreading ‘when am I going to fit this (boring) work in?’
Thanks for providing the environment and the colleagues Ron, to allow this change in us.
Best regards,
Daryl
This type of pricing isn’t for wimps, or for people who want to tally up hours. This is pure Value communication and creation, along with capturing a comensurate share for the firm. Here is what I wrote to Daryl:
Hi Daryl,
This is incredible my friend.
It contains two great points, which I believe only advance pricers will ever understand: 1) your concept of “emotional capacity” as a basis for pricing; and 2) that high prices actually drive higher value, both in service delivery and as perceived by customers.
Daryl, thank you for continuing to generously share your Intellectual Capital through VeraSage, it’s a contribution that’s priceless. Thanks for making today an HSD!
Ron
Daryl responded: “You are correct that higher prices drive higher service delivery. I’m already on a plane much higher than with similar engagements at a lower price.”
If you are inspired by this post, and do something to your pricing as a result, you are at an advanced stage, probably the top 1% of your colleagues.
If this post frightens you, you have a ways to travel.
Ron Baker - 11/28/2007
Thank you to Stephanie West Allen over at Idealawg for sending me this blog post from the Blog Morepartnerincome on a pricing article by Ward Bower, a principal with Altman Weil, Inc.
There’s so much to refute from these two sources it’s hard to know where to start. Let me begin with this excerpt from another post from morepartnerincome on the necessity of contemporaneous timekeeping for attorneys:
You can’t accurately place a value on a task without recording the time it takes to do it. You can’t accurately place a value of an hour’s work without recording the time you spend working.
Really? This explicitly assumes that there is a relationship between time spent and value to the customer. This labor theory of value was refuted in 1871; it’s hard to believe that people continue to hold this belief.
The post goes on to explain how to enforce compliance to ensure attorneys keep track of their time. How inspiring for a knowledge worker to have to account for every six minutes of their working life and be reduced to an aggregate billable hours number at the end of year. And the profession wonders why it can’t inspire top talent?
But even more amazing is the Ward Bower article. Here’s how he begins:
Billing for legal services is an art, whereas pricing is more of a science.
Not really. It’s the opposite. Billing, which is almost always done in arrears, is actually a form of mail fraud. Multiplying an arbitrarily determined hourly rate, which Bower even provides a tidy little formula for computing, by logged hours on a timesheet hardly rises to the level of an art.
It’s purely a rote function that takes no creativity, imagination, innovation, or having an understanding of the actual value you are creating for the customer.
At least Bower does discuss the customer’s ability and willingness to pay, which is another way of saying the value of what they are receiving. But he does it all in the context of hourly rates, which assumes there is a link between time and value. This is such a colossal economic fallacy it’s hard to believe Altman Weil gets away with promulgating this nonsense year after year. Maybe they do it just to sell their Survey of Law Firm Economics?
Bower goes on to suggest that the firm must position its hourly rates in the external marketplace. Of course, this is a form of reverse competition. What’s the hourly rate of the most expensive firm in town? The least expensive? Most firms choose somewhere in the middle. This is letting your [dumbest?] competitors set your rate. This hardly qualifies as strategic pricing.
Yet that’s not even the main flaw. The main flaw is the underlying premise that hourly rates can communicate, create and capture value. This is never challenged, and is a result of flawed thinking. We at VeraSage hear ad nauseamm, “Enough with the theory of Value Pricing, show us how to compute value.” This is the equivalent of physics students telling the professor, “Enough about the theory of the atom, show us how to make a bomb.”
All learning starts with theory, and there’s nothing more practical than a good theory. For proof, just look how much destruction the time equals value theory has caused in the legal profession. Until firms—and the consultants to them—change their theory, they simply will not progress from where they are.
There’s no formula for value, despite Bower’s feeble attempt to provide a mechanism that allows a firm to be precisely wrong. Value requires that a firm be approximately right. The only way to understand value is to understand your customer, their value drivers, their business model, and how a particular service is going to benefit them, both economically and psychologically.
You can’t do this with a formula or a checklist. Understanding your costs and desired profit level will also not help, since value drives prices, not costs.
I won’t even bother to refute Bower’s section on Alternative Pricing. Suffice it to say he drags out the old canard of hourly rates, costs, and efficiency, all of which have been thoroughly refuted in the Firm of the Future’s practice equation at the top of this Web page.
It amazes me that Altman Weil and other prestigious consulting firms to the legal profession get away with not having a new idea since the Soviets launched Sputnik. But this is only because their clients believe in the same out-dated management ideas. More proof that consultants aren’t really change agents, nor are they innovative thinkers.
Bower’s article is a testament to the Firm of the Past, both his and his clients.
Dan Morris - 11/27/2007
Since SOX was passed and the insideous Section 404 work has been dumped upon our newest professionals, Ron Baker and I have been arguing that SOX is killing the spirit and lifeblood of our profession by forcing knowledge workers to perform boring, tedious, and useful work that is better suited for trained animals then for college educated, smart, nimble, and creative professionals.
Ron Baker - 11/23/2007
Dan Morris once wrote a post about an attorney who left the equivalent of a Mercedes Benz on the table, in terms of underpricing, with one of his clients.
I’m happy to report a story with the opposite outcome. It’s from Joel, an Enrolled Agent I met years ago in Florida at a CSI conference. Joel has been an enormous advocate of Value Pricing ever since, and has shared many success stories with me over the years. This one may be his biggest yet.
Here’s what he wrote in an email to me on November 21 regarding the pricing on a tax strategy he had developed for one of his customers:
I finally closed my deal. Because I could not charge a price based upon a percentage of the tax savings, I had to give my client a flat price. I made several projections. My client will save approximately $246,435.60 as a result of my structuring the transaction a certain way. My fee will be $80,000.00 with a $10,000.00 up-front payment and the balance paid out of proceeds when the property is sold.
VALUE PRICING LIVES!!!!! Thank you.
PS. You have my permission to use this story and my name as an example of what you teach. Have a great holiday.
Joel
Coral Springs, FL
One lesson to take from this story is: Does it matter at all how many hours Joel spent on this customer? Would knowing exactly how many hours he did spend have helped him in establishing the price?
Congratulations Joel. I don’t know if you’re going to buy a Mercedes or not, but there is certainly nobility in being paid for the value you create for the customers you are privileged to serve.
Ron Baker - 11/20/2007
An amazing editorial was published on November 12, 2007 in Advertising Age titled “Agency Community Needs to Look at Risk Differently.” [I’d like to thank Tim Williams for pointing me to this editorial. We do not know who actually wrote it].
The tone of the article is excellent, and it’s main point is absolutely correct. We love to ask audiences around the world where profits come from? This is after demonstrating how income is earned from the three economic factors of production: land earns rents, labor earns wages, and capital earns interest, dividends and capital gains.
Most people do not answer where profits come from correctly. We get all sorts of answers: customers, value, revenue minus costs (this mostly from CPAs, which is the technical definition of profits but doesn’t explain their origins).
The correct answer is: Risk. Profits come from risk, which is the role of the business enterprise. Not safety, not a guaranteed rate of return for showing up and having overhead and profit desires.
The Ad Age editorial understands this, using it as a club to beat the head of agency leaders. After pointing out that only 3% of marketers actually use true value-based compensation agreements, here are some of its more profound points:
If agencies want to move beyond the time sheet, they’re going to have to accept risk.
The value-based concept requires a more fundamental reshaping of how an agency is paid. It’s predicated on results, but it’s not an additive part of the compensation deal [as are overlay bonuses]. It is the deal. And it often involves agencies forsaking the relative safety of the cost-plus-fee system and taking on more upfront risk in exchange for a bigger payout on the back end. As a result, a true value-based agreement may mean a shop is getting paid only if business targets are hit. Most importantly, it defines an agency’s value as something more than just the hours it logs on time sheets, something agencies have been longing for ever since the death of the 15% commission.
A lot of agencies—especially those under the quarterly pressures that come with being owned by a public company—would rather avoid the risk that goes with these agreements. That’s fine. Making big bets isn’t for everyone. Those fee agreements do keep the lights on and the bean counters happy and, in the best cases, leave a little left over for investment in talent and tools. But they also commoditize agencies and do much to ensure that ad shops are viewed as vendors rather than partners.
To get out of this cycle, the agency community needs to look at risk differently. It needs to take a hard look at whether its output for marketers has value beyond the churning out of a commodity product, whether its work is something worth making a real bet on. If the business isn’t willing to put its money where its mouth is, then maybe it’s time for it to stop flapping its lips on the compensation issue. Either give up some of that safety net or just stop worrying and learn to love the fee.
Wow. Amen! I can’t add much to that, since we preach the exact same message. In fact, in the October 2007 issue of The Advertiser, published by the Association of National Advertisers (ANA), senior fellow Tim Williams and I have an article entitled “The Future is Now: An exclusive ANA survey brings into focus new possibilities for value-based client-agency relationships.”
Kudos to Advertising Age for this brilliant editorial. Agencies need to stop whining about compensation methods and drive the change themselves, not their clients. Pricing is the responsibility of sellers, not buyers, especially changes in pricing models and strategies.
Ed Kless - 11/18/2007
It is not often that we at VeraSage comment on medical practitioners. This is not because we do not view them as knowledge workers, rather, it is because the system of third party payers — insurance companies (ugh) and governmental programs (double ugh) — is no where near a free market and therefore such examples are many times hopelessly flawed.
That being said, I recently came across a blog post from TechDirt which demonstrates that at least one physician out there is willing to be innovative. Here is a little of the text:
Dr. Jay Parkinson, a Brooklyn doctor, brought the house call back — but it’s been updated for the times. Parkinson has started a new medical practice that centers around instant messenger, email and house calls. During regular business hours, he is available to his patients for online medical consultations. Dr. Parkinson then pays the patient a house call only if it is really necessary (you get two included house calls in the fee), but most issues can be addressed virtually.
Kudos to Dr. Jay Parkinson! As a native Brooklynite myself, he makes me proud.
Ed Kless - 11/18/2007
Ron Baker in his smartly titled post Elephants and Blind Lawyers presents his take on Gary Hamel’s book The Future of Management. Recently, I completed reading it myself and would like to add to Ron’s thoughts.
First, I wholly agree that it is an excellent book, certainly in the top three that I have read this year. A few quotes and comments from the opening section of the book:
- “As managers, we are captives of a paradigm that places the pursuit of efficiency ahead of any other goal. This is hardly surprising since modern management was invented to solve the problem of inefficiency.” As Ron preaches we must destroy the temple of efficiency as it is meaningless to knowledge workers. Do you want an efficient heart surgeon or an effective one? I’ll take the latter.
- “Because the technology of management varies only modestly from company to company, you’ll find that most of the failings you need to address of endemic rather than idiosyncratic.” As advocates of systems thinking put it, the problems are with the system, not the performance of the required tasks.
- “Every business is successful, until it’s not.” I know, duh, but it also profound.
- “If you wring all the slack out of a company, you wring out innovation as well.” Every owner of a PSF dreams of having a firm where everyone bills 100% of their time. Hamel’s warning is that this dream would quickly become a nightmare.
- “Rule following employees are worth zip, in terms of the competitive advantage they create.” Who’da thunk it; we want rule breakers!
- “The most valuable human capabilities are precisely those that are the least manageable. While tools of management can compel people to be obedient and diligent, they can’t make the creative and committed.” Can you say, “Trash the timesheet?”
Hamel then goes on to tell three management innovation stories: Whole Foods, W.L Gore and Google. A quick summary of each company’s innovative practices include:
- At Whole Foods each team on the store floor does its own hiring, not a manager the team itself. The reason is simple, compensation is at a team level and the teams naturally do not want to hire anyone who will be a slacker and impact their pay. Employees are given unprecedented access to data including salary information for everyone at the store and statistics of all store departments of their store or any store in the chain. One person put it best — For Whole Foods profits are the score, not the game.
- At W.L. Gore there are few titles and no bosses. Some people have been granted the vaulted title of Leader. All leadership is elected, including the CEO. Tasks can’t be assigned, only requested and accepted, but the incentive is to do more for the team not less.
- At Google they only hire absolute A-level people. They call this the no bozo rule. The believe that if they let in one B-level person, that they will be jealous of all the A’s and therefore want to hire a C-level person that they can feel superior too. Wow. The average manager has 50 direct reports with some have as many as 100. All Google employees are expected to spend 20% of time tinkering on what is called a pet project.
In the last section of the book, Hamel describes his thoughts on some models for the future of management. He admits he does not know for sure if this is what things will look like. His models include:
- Life: In order to evolve life needs to mutate. If our DNA were digital we would soon die out as a species. We need to experiment more and standardize less. This is how we improve.
- Markets: Hamel tells an excellent story about how at Best Buy, experts in company forecasting were consistently outperformed in their predictions by opening the predictions up to a few hundred people in the organization, most of whom did not have access to all the information that the experts had. However, these people had the wisdom of the crowd. In essence, they had more information in total then the handful of experts.
- Democracies: It is surprising that in market-driven countries most companies use the third world dictator model for management. We need to get more power in the hands of our people.
- Faith: The major religious faiths have been around for thousands of year due to a continuous focus of the mission. If we strengthen our missions and people are aligned with them we will reap the rewards.
- Cities: Most modern cities are truly diverse places in terms of inhabitants. They are also hot beds of creativity. If we encourage our companies to grow in diversity we will magnify our creativity.
I hope the helps you in your decision to add this important book to your reading list.
Ron Baker - 11/18/2007
This past week I presented at the 53rd Annual Minnesota Society of CPAs Tax Conference, attended by about 1,400 people. I presented three sessions: Succession Planning; Human Capital, Not Cattle; and Everyday Ethics.
I always love going to Minnesota because the CPAs we meet there are very progressive, as it their Society and its leadership. At the end of my Human Capital talk, a 30-something CPA approached me and asked me the following profound question [I’m paraphrasing here]:
Ron, I’ve been following your work for years, have read a lot of your books, heard you speak before, and read the VeraSage Web site regularly. I wrestle with your ideas. They are quite difficult.
I think you’re right about what is needed to rejuvenate our profession, but I’m curious: How many of the CPAs that you present to truly, really, understand your message?
This is something we at VeraSage think about all the time, and there’s no easy, empirical answer (I wish there was!). Some people take years to absorb these ideas, others grasp them immediately. I had to answer in total candor that only 10% of any given audience will actually be able to implement what we discuss.
There are many reasons for this, many that are beyond my capacity to understand. But I do know this. The people who seem to grasp the ideas sooner rather than later are all intellectually curious. They are all voracious readers.
I’ve come to the conclusion that if you’re not reading at least 50 books a year, your Intellectual Capital (IC) is depreciating at such a rapid rate it’s nearly obsolete. How does a knowledge worker replenish their IC if they don’t read? Yet, when we ask audiences how many books have you read in the last year, very few can hold their hands up beyond a dozen or so.
I often hear the excuse, “I’m too busy to read.” What nonsense. Reading isn’t leisure, it’s work, or should be if you are a true knowledge worker. The “too busy” excuse doesn’t hold water, being a poor excuse itself.
Along with Tim Williams, I have recently had the great good fortune of working with the legendary Ogilvy & Mather advertising agency. Tim used to work there. When we first met, Tim told me that O&M people are readers, intellectually curious and constantly challenge the status quo. I recently did a presentation for a high-level group outside of London, near Oxford. [Where I also got to tour Blenheim Palace, where Winston Churchill was born].
I had some of the most intelligent conversations with this group, as they had nearly all read my Pricing on Purpose book. You could tell they were wrestling with the ideas it contained.
And maybe that’s part of the answer. People want easy answers, but pricing is like theology. You simply must wrestle with it, grasp it from different angles to gain a deeper appreciation for how complicated it really is to do optimally. We don’t give people easy answers, checklists, formulas or other pabulum. We transfer enough IC where you are capable of developing your own, and that’s the best we can do. Anyone who claims they have a “system” or “process” for pricing is a mountebank.
So what? Well, if we can only reach 10% of our colleagues, hopefully that will be enough to start a real diffusion (or “tipping point") in the profession. The question is, what does one do about the other 90%? Do you waste precious resources trying to convince people who might never get it in the hope that, as they say, when the student is ready the teacher will appear?
I’d be interested in your thought regarding this issue. In the meantime, if you’re reading this, you are obviously a 10-percenter.
Ed Kless - 11/18/2007
Sometimes, we need to go back to the very basics.
While facilitating a class on project management, I always take the opportunity to spend a few minutes defining some basic concepts since as Plato said, “all knowledge begins with the definition of terms.” Of course, for a project management course, the first term would be project.
What is a project?
According to the Project Management Institute (PMI) a project is “a temporary endeavor undertaken to create a unique product, service, or result.”
In my experience further refining two words in this defintion provides tremendous insight into the topic of project management. They are: temporary and unique.
To understand a project as temporary is to understand that it must have a clearly defined end. Too many projects are allowed to continue on seemingly ad infinitum. More often consultants struggled to obtain sign off from a customer to clearly end the project. These two situations are caused by a lack of or poorly defined project objectives.
One metaphor that has helped me over the years is to think of a project as a temporary company — one that comes into existence for the sole purpose of obtaining the objectives of the project and then goes out of business.
To understand a project as unique is to understand that while you many have participated in similar project each one in truly different. There is no such thing as the “plain vanilla” or standard project. Each project has a different set of goals, objectives, constraints, and of course, personalities. Customers who ask you for the “plain vanilla” project are ignorant of these facts. (Note that the same customer who asks for the “plain vanilla” project will likely state, often times only five minutes later, that their company does this “very differently” from others you many have encountered.)
Projects have characteristics.
In addition to these important clarifications about the definition of a project, there are other characteristics of projects that are not stated outright in the definition. These include:
- Are often times focused around a team drawing from multiple departments or disciplines
- Are in most cases business critical
- Can vary widely in budget, staff size, duration, expected outcomes
- Have conflict
Regarding this last item, I always pause to give some tough-love advice. People who are truly conflict averse should not be project managers. Projects by their very nature are agents of change. Change in people and in organizations causes conflict. A conflict averse person will often times not address people problems in a timely fashion resulting ultimately in the failure of the project.
Projects are not process.
Companies often fail to recognize that they do in fact have a project which requires better project management. Oone way to assist companies in recognizing projects if to see if the tasks they are working on fit into any of their normal business processes. Whereas projects themselves are linear and have a clear beginning, middle, and end, processes recur at regular intervals. A process could happen once an hour, day, week, month, or even year. A project clearly only happens once.
Projects have processes.
While projects are not processes, projects have processes. It is the consistent application of these individual simple processes that makes even the most complex project attainable. Project management processes call for the identification of inputs, tools and techniques, and outputs. Inputs are the source of the information, which can be new, meaning they never existed before this beginning of the process, or they can be from reuse, meaning their create happened during a previous process. This input data is gathered and then acted upon by the project team using the tools and techniques. The results are the outputs.
Projects have a life cycle.
In order to improve project management control, project managers divide projects into three or more phases. Together, these phases are known as the project management life cycle. The initial phase is devoted to initiating and possibly some planning. The intermediate phase or phases are for detailed planning and execution, while the final phase is centered almost exclusively on closing the project.
Projects are progressively elaborative.
Progressive elaboration is the constant comparing of the progress made during a project against the original plan and then making changes and updates to the plan through the use of change requests.When you really thin about it, It is through progressive elaboration that project managers really do their work. An important point is that progressive elaboration is an art not a science. This is why estimates of project costs are less accurate at the beginning of a project than at the end. It is also why the vast majority of projects should have dozens of change requests. Project managers are not psychics and even if they were we should recall that, as South Boston comedian Dennis Leary put it, “Psychic friends network went out of business. Ya think they shoulda seen that comin’.”
Webmaster - 11/13/2007
In November, Ron Baker and Chris Marston spoke to the graduate network of Atticus in a teleseminar on Value Pricing for Lawyers.
You can download the seminar here.
Please note that this file is approximately 10MB each so it may take a minute to download.
Ed Kless - 11/10/2007
I’ve wanted to write this post for some time, but have been reticent because it is not necessarily related too much else.
Several years ago, I heard Don Peppers tell this story (I found this version on the web):
Roger Dow of Marriott discovered that a $1.5 million IT investment was not the answer to hotel sector CRM. A nod and a wink achieved the same result at no charge.
Roger Dow, a senior VP at Marriott, asked his IT staff to come up with something that would give them a fraction of the ‘customer recognition’ capacity of the Ritz-Carlton hotels — just enough to enable a clerk at the check-in desk to say “Welcome back” to a guest because the computer tells them that guest has stayed there before.
The IT team came back a few weeks later and said they could do it for $1.3 million and it would take 18 months. Dow went ballistic. Shortly after, he was visiting a small mid-western Marriott. As he approached the check-in desk, the clerk smiled warmly. “Welcome back, sir,” she said.
Dow dropped his bag in astonishment “What did you say? I’ve been trying to get our IT people to make that work for months. Do you know who I am? I’m the VP of Marketing. I didn’t tell you I’d been here before! It can’t say that on the computer system!” he blustered.
The check-in clerk, feeling she had done wrong, explained: “Well, you see, when the bellboy picks up the luggage from the car, he says to the guest: ‘Is this your first visit?’ You must have said ‘no’ and forgotten. Because, when he puts the bag down next to the desk here he winks at me. That’s code. It means you’re a returning guest, so I say “Welcome back, sir.”
This is a great illustration of what I have believed for years — many professionals are lured to solve problems with technology that do not need technology to solve. Time after time I have spoken to audiences about project management and inevitable someone will ask what kind of technology should they use to track projects. In some cases it is a genuine wanting, but in most situations it is usually a question designed to be an excuse as to why they cannot do what I am suggesting.
What problems are you trying to solve via technology that perhaps you don’t need technology to solve?
Ed Kless - 11/05/2007
For those of you who continue to insist that value is not in the eyes of the buyer, I humbly submit this story from Guardian Unlimited in the UK. Thanks Paul O’Byrne for passing this one to Ron.
Apparently, the owners and patrons of Claridge’s have not seen this episode of Penn & Teller’s Bullshit from 2001. This is a staple video of the VeraSage Fellows on the lecture circuit.
Think of the money Claridge’s would save if they just served Agua de culo.
Ron Baker - 11/04/2007
The Dean of the Stanford Law School, Larry Kramer, has an interesting Foreword to the recent issue of The Stanford Lawyer, basically questioning whether the current foundation of the legal profession is sustainable. It’s a quite interesting read (thank you to Stephanie West Allen for pointing it out to me). For instance, Kramer states:
Certainly our profession has changed profoundly in the past generation. The basic structure still looks the same: Most lawyers practice in firms, most firms are partnerships with cadres of associates, most work is performed for hourly fees, and so on. Yet it’s the traditional model on steroids: Big firms employ thousands rather than hundreds of lawyers, with offices around the world. Partner/associate ratios have changed dramatically, particularly if we focus on equity partners, while legal work has become increasingly specialized and expectations for billable hours have soared.
Such changes have consequences. Clients, especially corporate clients, are less willing simply to pay what firms charge and much less willing to subsidize the training of young associates. Technology has exacerbated this trend, enabling clients to do for themselves things they used to need from outside counsel. Making a practice profitable has increased demand for lawyers to bill hours, which has, in turn, forced firms to raise salaries, which has further increased the need to bill hours. Partly as a result, new associates seldom join firms intending to stay for more than a few years. Lateral hiring has exploded, undermining the culture and sense of community of many firms. And factors like these have stymied or undone progress that was just beginning to be made in advancing women and minorities into the top ranks of legal practice.
Twenty years ago, most lawyers would have scoffed at the idea that profitability, much less profits-per-partner, should be the measure of success and prestige. Yet that is where we are. Law firms are run like businesses by managing partners and committees whose time is almost wholly occupied with, well, managing. And competition is fierce: to be bigger, pay more, bill more hours, and open more offices. To be more profitable.
Does anyone actually want this? The lawyers, managing partners, and general counsel I meet are deeply concerned about what’s happening. Yet they feel unable to stop it, powerless to resist the stifling market forces that drive their decisions. And for good reason, because the problems are complex and exist at every level. Students say they want a better work/life balance, yet invariably choose the firm that ranks highest in The American Lawyer’s list of the top 100 law firms. ... And on and on. No one can be blamed when everyone is to blame.
I have no answer to this. ...
Bruce MacEwen over at Adam Smith, Esq. does have an answer. He’s labeled Kramer’s rant “nonsense on stilts.” I find Bruce’s point-by-point refutation of Kramer compelling, and agree with it as far as it goes.
The problem is, it doesn’t go far enough. The problems Kramer so ably lists are symptoms, not causes. The root causes are the failed management beliefs of firm leaders and the obsolete business model of law firms, as embedded in VeraSage’s Firm of the Past Practice Equation:
Revenue = People Power x Efficiency x Hourly Rate
This business model is obsolete in an intellectual capital economy, yet the legal profession acts as if they don’t recognize this fact. It continues to sell hours even though their customers are really buying intellectual capital. It continues to price by the hour even though the labor theory of value has been discredited for 136 years. The elephant in the room that nobody mentions is this flawed business model, and the mangement ideas it’s based upon.
This is particularly timely because I recently read Gary Hamel’s new book, The Future of Management. It’s excellent. In fact, it was so inspiring I presented a book report to my VeraSage colleagues at our recent worldwide meeting in Las Vegas. Here are some gems from Hamel:
Your company is being managed by a small coterie of long-departed theorists who invented the rules and conventions of ‘modern’ management back in the early days of the 20th century. Management is out of date. Like the combustion engine, it’s a technology that has largely stopped evolving, and that’s not good.
Today the most valuable human capabilities are precisely those that are the least manageable. While the tools of management can compel people to be obedient and diligent, they can’t make them creative and committed.
The real reason it takes a crisis to provoke big change: too much authority has been vested in too few people.
The billable hour and the timesheet date back to the Scientific Management Revolution of the late 19th and early 20th centuries! They are obsolete in a knowledge economy. This is what all of my writings, and indeed, the Purpose of VeraSage is dedicated to burying. Yet these beliefs are firmly entrenched in the minds of PKF leaders. It’s sad that they are not willing to challenge their most sacred ossified managment philosophies.
This is why I found Hamel’s book so compelling. It is a call to arms, a sort of Declaration of Independence from the outdated management beliefs of the past. Hamel makes the case that management ideas have created more wealth than any other type of idea, and he’s right. Our economy continues to innovate new products and services, new business models (Google, Amazon, etc.), but has literally stopped developing new management theories. This is tragic, especially since we are 50 years into the knowledge economy, yet most of our sacred management beliefs date back to the early 20th century.
When I read the book, I couldn’t believe how much it aligns with VeraSage’s New Practice Equation (see the top of our Web site page). Hamel has this three-step test to guage a true management innovation.
- Is a novel management principal, challenges long-standing orthodoxy
- Is systemic, encompassing a range of processes and methods
- Is part of an ongoing program of rapid-fire invention where progress compounds over time
Our New Practice Equation meets every one of these tests, which is why we encounter so much resistance from firms, especially large ones. I’m firmly convinced that human beings are far more guided by their beliefs than their knowledge, and changing those beliefs is no easy task, especially when they’ve had over a century to diffuse.
Hamel offers this four-step program as a line of attack for challenging present management orthodoxies:
- Is this a belief worth challenging? Is it debilitating? Does it get in the way of an important organizational attribute that we’d like to strengthen?
- Is this belief universally valid? Are there counterexamples? If so, what do we learn from those cases?
- How does this belief serve the interests of its adherents? Are there people who draw reassurance or comfort from this belief?
- Have our choices and assumptions conspired to make this belief self-fulfilling? Is this belief true simply because we have made it true—and, if so, can we imagine alternatives.
Once again, VeraSage’s work meets everyone of these tests. Our Trailblazers are the counterexamples—we refer to them as Black Swans, in tribute to Nicholas Taleb’s wonderful book of the same name—that are blazing the trail the rest of the professions are destined to (eventually) follow. The question is only a matter of how long will it take for other PKF leaders to challenge their outdated beliefs and face these new realities. They are adept at whining about the symptoms, but utterly fail when it comes to dealing with the causes—their anachronistic management beliefs.
Let us deal with the elephant in the room, no longer hiding behind theories that have been refuted in an intellectual capital economy. Let us make Adam Smith proud, restoring the magic of the marketplace and aligning it with the knowledge workers who create the majority of wealth.
It’s past time to change the management beliefs in PKFs. All leaders should read Hamel’s outstanding book. For those too timid to act on its advice, move aside for those who do.
Ron Baker - 11/04/2007
My latest book in the Intellectual Capitalism Series is now out.
Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth is third book in the Series, which are all centered around VeraSage’s New Practice equation:
Profitability = Intellectual Capital x Effectiveness x Price
Book one in the series, Pricing on Purpose: Creating and Capturing Value, explores the Price component in the above equation, while the second book, Measure What Matters to Customers: Using Key Predictive Indicators, posits that effectiveness is far more important in PKFs than mere efficiency. It also attacks the McKinsey maxim of “What you can measure you can manage” as spurious.
Mind Over Matter deals with perhaps the most difficult aspect of the above equation: Intellectual Capital. I say that because it was, by far, the most difficult book I’ve written to date. How do we know what we know? How do we capture it so we can leverage it into the future to create wealth? How do we know when it becomes obsolete? These questions, and more, are all dealt with, from a economic, sociological, and historical perspective.
As always, I’m indebted to many people who contributed to this work. Mostly, my colleagues at VeraSage who advance my knowledge day-by-day. Special thanks to Dan Morris and Paul O’Byrne for allowing me to include essays in the book on how their firms are leveraging IC. Dan explains his firm’s Concierge Service Model, while Paul describes OBK’s Knowledge Bank, use of After Action Reviews, and the GOBS MBA program. These are all incredibly innovative strategies to leverage IC, create a competitive differentiation, and command premium prices.
I’d also like to thank Niquette Kelcher of SmartPros for conducting this latest interview. Niquette has always been an enormous supporter of VeraSage’s work, always taking the time to read my last three books in manuscript form while providing valuable feedback.
As always, I welcome any and all feedback on any of my books. I hope you find this latest one worthy.
Ed Kless - 11/02/2007
Yup, you read the headline right. From their site:
MIT is committed to advancing education and discovery through knowledge open to everyone. OCW shares free lecture notes, exams, and other resources from more than 1700 courses spanning MIT’s entire curriculum
Why would they do this? Does it make their intellectual capital worthless?
Wrong-o my friends. Just the opposite! MIT has expanded their enrollment (paying customers, err students, err parents of students) in rcent years and wanted to attract the best and brightest worldwide. It is paying off big time. Over 50% of the incoming students cited the free course work on-line as a factor in the decision to attend.
So, what is your most valuable intellectual property and what are you doing to put it online?
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