Community Section -
Dan Morris - 12/31/2007
Recently I received an email from a VeraSage friend, Richard Muscio, a CPA in San Diego. Richard has been value pricing for many years and has frequently discussed his observations about our Profession’s blindness to the obvious. I will let Richard’s voice present his comments now:
“Hi Dan! I went back in time last week when I was talking to a CPA about outsourcing and CPA practice management. I mean, back in time to the point where I was contemplating pulling my old leisure suit out of the closet (yes, its still there) and heading on down to the Disco Palace (oh wait, the Disco Palace is now a Yoga studio...).
This CPA, a partner in a 6-partner, approximately 50-person firm, said that as long as partners” compensation is about 33 % of their firm’s gross fees, their practice is great. He added that team members” (although that’s not what he called them...) compensation should also be about 33 % and general overhead should likewise be 33 % of gross income. Finally, he stated that this “33-33-33” model is very standard for the CPA industry. This conversion took me way back in time because the last time I heard about this practice management concept was in 1979. In 1979, I was a 21-year old junior staff accountant at a 7-person firm. The firm’s owner told me about this “33-33-33” model. And, I know what he told me was approximately true for his firm, as I in my status as most junior accountant did his firm’s books.
When I went out on my own a few years later, with two team members, I immediately priced our hourly billing rates to try to achieve this 33 % net to owner result. However, as I proceeded to develop a specialized estate planning practice, I realized that the only way to make more money with this model was to do more work. And, since I wasn’t married yet, I preferred spending time at the Disco Palace to spending time in my office. So not only did a profit goal of 33 % seem both arbitrary and low-reaching, it make no sense. In terms of my specialized practice, I evolved into a “fixed price/value billing” model for my estate planning practice, and suffice it to say the “33-33-33” model wound up in my closet, next to my old leisure suit.
But what also occurred to me during my conversation with this CPA is that in 1979 my former employer had no line item on his P & L under general overhead for technology expenses. The only technology expense was for land-line telephones. We didn’t even have a FAX machine in 1979. Further, the firm billed our customers for the costs of using outside processing firms for income tax preparation and financial statement preparation. In fact, we marked every charge up by $10. Now, the firms that I consult with have huge expenses for technology in their general overhead 33 % piece: computers, servers, laptops, FAX machines, scanners, sophisticated computer programs, cell phones, Blueberries and all that other high tech stuff that when it doesn’t work I get my 11-year old daughter to fix it for me. Plus, they pay IT management firms to maintain their systems.
I seriously doubt that today any CPA firm averages its technology costs among its customers, and then passes those costs through on customer billings like we did in 1979. My understanding and use of technology has always been to attempt to use it to become more efficient and thus more effective at providing value to my customers. By providing more value, my customers make or get to keep more money. Following this, I make more money. So do my team members. So my second complaint about the “33-33-33” model, besides the fact that is represents an arbitrary and low-reaching goal, is as follows: how can a CPA practice management model that existed before all of our new-fangled technology (even the FAX machine...) have any relevance to today’s CPA practice in a high-tech world? This question assumes, of course, that the “33-33-33” model was even valid way back in 1979. Or are most CPA’s just sheep, and stuck in the disco era to boot?
Further, assuming 33% net income is a worthy minimum goal, why don’t CPA’s (if they really are business consultants...) finds ways to improve their own firms’ bottom line, not just in real dollars, but in terms a achieving a higher percentage result. Why not a 60% or 70% bottom line?
I know that you and Ron have a lot of knowledge about devices like this that keep the profession shackled, such as the dreaded timesheet and hourly billing. What do you know about this “33-33-33” model? Is it really still prevalent in our profession? Where did it come from and why is it still here? What else about it makes no sense? Whatever light you might be able to shed on this topic would be most appreciated. You can find me at the Yoga studio...best wishes for a wonderful Holiday Season!”
Richard presents several keen observations about the toxic nature of legacy mental histograms that distort professional knowledge firm leaders’ belief systems and how they define success. Clearly the 33-33-33 paradigm is simple. However it is not elegant. And, although I don"t know its origins, I am certain that in large pyramid style firms of lore, that the top third was happy enough and either didn’t desire additional profits or worse yet, didn’t believe they deserved additional compensation for transferring knowledge in exchange for compensation.
Although Richard has a few years on me (not many but enough) as my leisure suit was lime green and stopped fitting me around tenth grade, I do appreciate his perspective that it was more fun to be dancing at the disco than racking up billable hours at a low rate.
I have noticed that our profession holds onto legacy thoughts and concepts well past their useful lives. We still treat people as resources and assets instead of knowledge workers. We over-stress supervision and management at the expense of leadership. We lack dynamic innovation and creativity. We simply lack curiosity (the worst offenders appear to be the auditors based upon recent experiences of leading discussions with over 300 California auditors and when asked how many had read a business book of any kind in the last year, less than 10 hands went up - the smallest percentage of book readers I have witnessed in years - shame! shame!).
CPA firms tend to be happy when gross revenues per professional team member approaches $200k. Cisco desires $1M in revenues per FTE (not just producer). The difference isn’t $800k. It is beyond astronomical. The difference is that for Cisco, there are no limitations. For CPA firms, everything is limited based upon inputs (mostly time and time is too limited for greatness when it comes to far ranging vision).
Managers of the Firm of the Past will continue to perpetuate old myths associated with operating a CPA firm. Leaders of the Firm of the Future will experiment, create, and innovate securing a future not limited to a prehistoric business model.
Comments welcome as we can all assist Richard better understand the chain of illogic and below par business practices that refuse to die and continue to endanger our profession’s future.
Ron Baker - 12/29/2007
The American Association of Advertising Agencies conducted a year-end poll of its members on important topics facing its industry. The question that intrigued me was this one:
How should advertising agencies be compensated?
- Agencies should bill for their time—26%
- Profit participation—pay for performance—16%
- A hybrid of hourly rates and incentives—55%
- No opinion—3%
Forget for a minute how 3% of the respondents could have “no opinion” on such a vital topic as how an agency should be compensated.
Only 16% said that pay should be based on performance, or what we call Value Pricing. The majority simply fall back to the status quo of hourly rates and incentives.
The problem with the hybrid answer is that the “incentive” is simply based upon an hourly rate basic price, which has nothing to do with value.
I have no basis for comparison of these results with prior year’s, but it does provide us with a vector of how much work there is left to be done to change the attitudes and beliefs of agencies.
Senior Fellow Tim Williams, founder of Ignition Consulting Group, is conducting a series of programs in 2008 specifically designed to help advertising agencies move to a Value Pricing model.
I’m proud to be part of this initiative, undertaken with the endorsement of the 4As.
Hopefully, we will be able to make progress on the above responses before next year’s survey.
Ron Baker - 12/29/2007
Peter Drucker was once asked why businesspeople fall for fads and fail to rely on empirical evidence, to which he replied:
Thinking is very hard work. And management fashions are a wonderful substitute for thinking.
I have found in my limited experience on this planet that, by and large, people do not engage in an endless search for the truth; they are too busy trying to maximize utility, or just achieve enough to get by (satisfice in economic jargon).
It’s why so many consultants can spew pabulum and get away with it. It’s why so many people challenge what we say based on what they believe to be truths that we long ago have falsified—such as the need to price by the hour AND keep timesheets.
But our arguments and evidence are not conducive to bumper stickers and a seven-step checklist, so people that aren’t taking the time to learn, reflect, read and experiment will reject them as preposterous, as most new ideas indeed usually are. Yet I remain amazed that they reject the empirical evidence all around them that have validated our theories.
This is one reason I wanted to to create a think tank, a place where people would not be concerned with anything other than the pursuit of the truth. VeraSage’s name says it all: Veracity + Sagacity, or true wisdom. Even though every one of our fellows leads incredibly busy lives, trying to run firms and maximize utility, they take the time to think and reflect upon broader issues.
Some say this is a luxury, or not relevant to the “real world"—an especially ignorant charge—but I believe in order to achieve a robust dynamism in the business world, one needs not only doers but also thinkers. As in the American Revolution, it was said that George Washington fought for it while Thomas Jefferson thought for it.
In that spirit, I was thrilled to see a post by fellow Chris Marston: ”Our Profession Has Stopped Thinking: How Else Could We Have Departed from Sound Economic Principles?”
Chris admits this was a rant he wrote while traveling to New York via train to meet up with me and Dan Morris so we could attend the preview to The Call of the Entrepreneur movie (more on that later).
Even so, it’s an excellent rant, one that should make us all pause as we approach the end of the year to deeply reflect on our accomplishments, objectives, and overarching purpose.
Thanks for the rant Chris! Sadly, I think you are right. Optimistically, I hope we at VeraSage have contributed to a resurgence of professionals thinking for themselves.
As always, I’d love to hear if you agree or disagree with Chris based on your experience within your chosen profession.
Webmaster - 12/27/2007
Senior Fellow, Ed Kless, was recently quoted in two industry publications regarding project management and pricing.
Channelpro magazine’s October issue contains an article entitled Cashing in on SaaS which includes the following paragraph:
If VARs charge by the hour, they negate their expertise—whether it is in a particular vertical or a set of applications—and this knowledge is the value they bring to an SMB, according to Kless. “Pricing, especially as it pertains to service or knowledge, does not come from cost,” he says. “Price comes from value. You cannot bill for knowledge by the hour. Your price has to take into account the value you are providing to a customer. I want our partners to get paid for what they know as opposed to what they did.”
More recently, in the Accounting Technology December 2007 issue in an article entitled Making Projects Behave, Ed is quoted as saying,
“Prescription without Diagnosis is malpractice, and if you sell a customer software without a project plan it’s prescription without diagnosis.”
The article includes a side bar tool developed by Ed on assessing project risk for a project from the provider’s perspective
Great stuff, Ed!
Ed Kless - 12/20/2007
For the past year I have been a huge fan of Mike Masnick who blogs over at techdirt. His insights into the economics of the digital world are just terrific. In fact, behind this space, Techdirt is my next “gotta read” blog.
To give you a small sample, I thought I would link to three of his posts over the last few weeks that I have found interesting, along with a sentence or two of commentary from me.
- On Google and Complementary Goods — this neat post does a great job of making the case for every business to spend some time thinking about and creating complementary goods. This is especially true for the Professional Knowledge Firm. What are you doing today to create these at your firm?
- On Hugh Phone Bills and Unsuspecting Customers — Masnick hits the nail on the head with regard to billing in arrears and its degradation of the customer experience. When are the phone companies going to wake up? For those of you who are nodding in agreement with me and still bill by the hour, I say look in the mirror!
- On Microsoft’s Name in Portugal — this is a fascinating commentary on the Coase Theorem (no matter who is assigned property rights, as long as transaction costs are not too high, the efficient outcome will be achieved). In this case it is about a small company which owned the URL microsoft in Portugal. Instead of waiting to negotiate with Gates and Company, they just put the URL up on eBay.
I hope this gives you some reason to go take a look at Techdirt and maybe even subscribe to it via RSS. One word of caution, Mike Masnick is prolific. He sometimes posts a dozen times or more in one day.
Ed Kless - 12/18/2007
A recent article by Roger Russell (November 5, 2007) in Accounting Today and also appearing on the webcpa site proves that just a focus on project management, rather than time, is sufficient to increase effectiveness, no matter how you price.
A quote from Mark Robinson of KAF Financial Group really summarizes it quite nicely, “We also became a project-based firm,” he said. “We stopped thinking about billable hours and started thinking in terms of getting the work done. We became more focused on working as a team to deliver projects, not on getting 75 billable hours per week.” (Emphasis mine.)
However, my favorite quote is from the articles author who, when describing Robinson results writes, “Productivity actually increased.” (Again, emphasis mine.) He seems incredulous.
Yes, you can actually increase productivity by focusing on the results not the efforts! We wonder if KAF Financial Group still bills by the hour and keeps timesheets even though they have already demonstrated the absurdity of hourly billing and tracking.
Ron Baker - 12/15/2007
Regular readers will know that Reed Holden, co-author, with Thomas Nagle, of The Strategy and Tactics of Pricing, a seminal work on pricing, is one of my mentors.
Reed was kind enough to write the Foreword to Pricing On Purpose, along with providing me with blurbs for my two other books.
Reed has his own new book coming out in February, 2008, Pricing With Confidence, co-authored with his colleague from Holden Advisors, Mark Burton.
In the December 13, 2007 issue of the Holden Advisors Newsletter, Reed wrote the following about Mind Over Matter:
Ron Baker is the most prolific writer in the field of pricing, with several top sellers to his credit. In this new work, he moves to a broader discussion of the value of intellectual capital. He draws from a wide range of the world’s greatest thinkers to spin an interesting web that does well to both support his point and draw the reader (me) in. Along the way, he takes on some of the flawed theories of pricing and business strategy. Another good read this month.
I am in the process of reading an advanced copy of Reed’s book and will review it here.
In the meantime, I suggest if you want to learn more about pricing, sign up for Reed’s Newsletter, always a terrific and thought-provoking read.
Thanks Reed!
Ed Kless - 12/15/2007
Today’s Dilbert is a great example of the fallacy of timesheets as a productivity measure.
Thank you, Scott Adams!
Ed Kless - 12/11/2007
There is clearly a difference, in good project management, between goals and objectives. Goals are which we hope to attain by undertaking the project; however, they are not always attained by project end because there may be other external influences that factor in the their achievement or lack thereof. Objectives are, well, objective, in that they can clearly be checked off as having been attained by project end.
For example, “increase sales by 10%” would be a goal of the project not an objective. An objective would be the “installation of the system.” The acid test question to distinguish one versus the other is, “Can this (goal or objective) be clearly accomplished when we consider the project to be completed?”
I am not saying that we should not continue to track project goals post completion; I am just saying that they need not be accomplished in order for us (and the customer) to consider the project done.
Lastly, if a customer wants you to guarantee the attainment of goals than I would have you consider contingency pricing. For example, if they do increase sales by 10%, you should be paid 50% of that number. In a sense, a customer asking you to guarantee goals, is like that customer asking a lawyer to guarantee winning a case and therefore subject to a contengency arrangement. I would, however, guarantee meeting all objectives.
Ed Kless - 12/11/2007
In the spirit of the holiday season, I thought I would make mention of something I came across in the last year — Pricing with purpose (aka Value Pricing) is founded in the scripture of the Old Testament. Here we quote from Ecclesiates, Chapter 2, verses 17 through 20:
17 So I hated life, because the work that is done under the sun was grievous to me. All of it is meaningless, a chasing after the wind. 18 I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. 19 And who knows whether he will be a wise man or a fool? Yet he will have control over all the work into which I have poured my effort and skill under the sun. This too is meaningless. 20 So my heart began to despair over all my toilsome labor under the sun. 21 For a man may do his work with wisdom, knowledge and skill, and then he must leave all he owns to someone who has not worked for it. This too is meaningless and a great misfortune. 22 What does a man get for all the toil and anxious striving with which he labors under the sun? 23 All his days his work is pain and grief; even at night his mind does not rest. This too is meaningless.
My exegesis is that the phrase “under the sun” can be translated as “on my timesheet.”
Happy Hanukkah and Merry Christmas!
Ron Baker - 12/10/2007
Thanks to Stephanie West Allen over at Idealawg for sending me the December 7, 2007 article from the Dayton Business Journal: “Firms rethink billable hours to retain women.”
One issue I’ve changed my mind over the years of teaching Value Pricing to Professional Knowledge Firms is what is going to be, ultimately, the motivation for them to change?
I used to believe it was in order to achieve a better quality of life and earn more money in the same amount of time. I no longer believe this is a big enough “burning platform.” Most firms are fat and happy, and success hardly ever induces deep change.
Now I believe it will be the talent crisis. The inability of firms across all of the PKF sectors to attract, develop and inspire knowledge workers. We don’t say “retain” because that implies knowledge workers are human cattle. Who wants to be retained?
As if more evidence of this were needed, now we are seeing attacks on the billable hour for the purposes of retaining women, at least from this article, which discusses the San Francisco firm of Heller Ehrman LLP.
Attorney Patricia Gillette has concluded the following regarding the billable hour:
Blame it on the billable hour.
“The system is just wrong. The problem is, nobody has said it out loud for a long time,” said Gillette, a partner at Heller Ehrman LLP in San Francisco. “We have just assumed this is the way law firms have to be. But it’s not.”
“What I’m seeing is, we’re hitting a breaking point with women,” Gillette said. “I think the billable hour is a real problem for the law firm of the future.”
Really, no one has said the billable hour is the problem out loud for a long time? Is she kidding? Richard Reed, who published three seminal books for the ABA, has been saying it since at least 1989, that’s nearly 20 years.
Gillette goes on to say:
[A]n alternative system could measure performance and set salaries without reference to the number of hours billed, and instead focus on productivity, efficiency and quality of work.
As for payment, law firms could charge a flat fee on a per project basis, though Gillette acknowledged that some in cases—such as a big antitrust case—it might be tricky to anticipate the cost.
“We don’t have a complete solution to it,” Gillette said.
Well, we do have solution to it, it’s called Value Pricing. As for the large antitrust case, scope what you know about the case, price it, and use Change Orders for unanticipated events. What’s so hard about this? Mechanics and contractors do it all the time.
I keep thinking about whether or not lawyers are intellectually curious, because in my experience they are. They are readers, writers, thinkers, and excellent debaters. How can someone like Patricia have never heard of Richard Reed’s books, VeraSage, and all the other legal blogs that have been debating this topic for years? It amazes me to no end.
The only way firms are going to be able to get out from under the Sword of Damocles is to recognize their customers don’t buy time, hence they don’t sell hours. Reducing the number of billable hours is simply not going to work to retain any knowledge worker, man or woman.
Sophisticated knowledge workers understand the value they create is not predicated on the time they spend, but rather their intellectual capital, creativity, innovation, ability to synthesize knowledge and a myriad of other traits that simply cannot be captured in the one-dimensional world of hourly billing and timesheets.
Another firm the article discusses is Hanson Bridgett Marcus Vlahos & Rudy LLP, a 144-lawyer firm in San Francisco and Sacramento that last month lowered its annual billable expectations from 1,850 to 1,800. Yippy skippy, alert the press.
This doesn’t deal with the problem that law firm leaders are mired in the mentality they sell time, forcing them to operate under the incorrect theory of value. Start with the wrong theory of value, and you will end up with the wrong conclusion, no matter how “efficient” you are. Reminds me of the man who tells his wife while driving, “Yes, dear, we’re lost, but so what, we are making great time.”
The managing partner of this firm, Andrew Giacomini, said about this lowering of billable hour requirements:
“This latest thing is a recognition that our profession, in terms of the expectation of billable hours, has been kind of moving in the wrong direction and we wanted to take a step back and say, ‘Hey...this is reflective of our values,’” Giacomini said.
Well, if billable hours are part of your values, you need to change your value system. Start by recognizing that your law firm’s purpose is to create value for the customers it is privileged to serve, and that you are entitled to capture a concomitant portion of that value through pricing on purpose.
Until then, firms will continue to lose their human capital investors of both sexes who don’t want to be retained, or work in modern day sweatshops to the rhythm and cadence of a ticking clock.
The billable hour isn’t the problem; it’s merely a manifestation of the incorrect labor theory of value that props it up. That theory needs to be replaced. It’s obvious we have a long way to go.
Ron Baker - 12/09/2007
We at VeraSage love examples of pricing that defy the calculus of any pricing consultant. Items such as the $1,000 omelet, $100 hamburger and $1,000 pizza have all been written about before.
Thanks to Paul O’Byrne—who is feeling much better from his second round of chemo, as he wrote on his blog Thursday—for letting me know about this most recent example.
The London nightclub Movida nightclub is offering the world’s most expensive cocktail, named the Flawless. Here are the ingredients:
The cocktail consists of a large measure of Louis XII cognac, half a bottle of Cristal Rose champagne, some brown sugar, angostura bitters and a few flakes of 24-carat edible gold leaf. The drink is described as warming and refreshing, but that is not the main reason for the exorbitant cost: at the bottom of the crystal glass is an 11-carat white diamond ring.
I don’t know about you, but the fact that it contains an 11-carat white diamond ring at the bottom of the glass actually diminishes its perceived value (sorry Michelle; and no, you may not have one at VS expense).
This made me think of two points. First, establishing a true Value Price is much more difficult than simply grinding endless equations. Those may be helpful, but at best you will end up with something that is precisely wrong.
If you believe value is subjective—and we at VS, like the Austrian economists, fervently do—then running regression analyses of historical supply and demand equations is no way to seek what something is truly worth to someone else. I realize companies have to do this, but it doesn’t mean it’s accurate.
The second point is on some of the comments written about this cocktail being nothing but conspicuous consumption by the super-rich (and super-dumb). These two comments are my favorite:
“It’s like sticking two fingers up at the rest of society,” said the Labour MP Sion Simon. “You might as well set fire to your money in front of those less well-off. It’s a very deliberate way of saying ‘We are not part of the same country as you.’”
The drink will appeal to “the stupid segment of the super-rich”, said the social commentator Peter York. “It is so gauche, so crashingly crass, that everyone else will see the buyers as barely literate, as one step up from a potato.”
Sure, £35,000 exceeds the annual income of approximately three-fourths of the workforce in the UK. So what? Wealth doesn’t cause poverty. In fact, wealth is the only antidote for poverty.
What would you rather the super-rich spend their money on? Food you eat, housing you desire, automobiles you want to drive, or other wants of the middle-class, thereby driving up their prices?
We want the rich to blow money on things like this, and not bid up the prices of those items the rest of us want.
I remember reading in Robert Frank’s book, Luxury Fever, about how our spending on luxury goods is growing four times as fast as overall spending, thinking again, so what? Isn’t that a sign of prosperity? He also tells this story:
The barstools aboard the late Aristotle Onassis’s yacht, The Christina, were covered with the buttery soft—and jarringly expensive—foreskin of the sperm whale penis.
Good. Better he spent his money on things the rest of us can’t than on those items within our reach that we desire.
Stanley Marcus, son of one of the founders of Neiman Marcus, invented the His and Her Christmas gifts, that still make headlines to this day. But he also did something else incredibly smart from a pricing perspective.
He would include in his catalog and stores gifts costing no more than $50, realizing the halo effect the catalog created. Brilliant marketing, and pricing.
Three cheers for the Flawless cocktail, a fine example of why value is subjective (yes, they’ve already sold some).
Let’s see if they provide a mini-version of the drink, for say, £5,000. I’m sure it would do well (again, no Michelle).
Dan Morris - 12/06/2007
Long before there was Value Pricing, Ron Baker (with me joining later) educated firms about competing on service and that before a business can charge premium prices, they must provide their customers with Total Quality Service. Today was simply one of those days where the service quality I received from one of my preferred service providers failed. The company that failed me was National Rental Car. I guess I should really lay all of this at Baker as he was the one who introduced me the benefits of National’s Emerald Isle service (prior to Baker or in Paul O’Bryne speak sometime in late BB {Before Baker}) I was simply renting cars from whomever would rent them to me cheaply. But I digress.
I am a frequent renter of their vehicles and I am in their 2nd status tier known as Executive Selection. On Sunday I returned one of their cars in Portland, Oregon. Today (three days later) I received a statement indicating an additional charge of $15 for 2.4 gallons of gas as they claim that my full fuel tank was not really full. Having fueled my vehicle before returning it, I was just a little miffed about this added charge. So, I called the number of the invoice and of course they couldn’t help me (but they could help me with a rental) and they transferred me to the customer service line where the phone call was dropped. So, I called the special 800 number on the back of my card where I thought maybe they could help me. But no, the Executive Selection line is for rentals - if you want to discuss an issue about a closed transaction, well then, one has to call the customer service number and the nice lady who was attempting to transfer my call when my call was dropped for a second time. Lets call that strike 2.
So having been dropped twice, I called the customer service number directly where my call was answered by someone with a worse attitude then I had. I attempted to explain my situation and my request for an adjustment when he interrupted me and challenged me about whether “I had a receipt” or not. Well I told him I did and I again went to discuss my situation and he again interrupted me and essentially challenged me while simultaneously presenting his questions in a very smug tone. His tone only exacerbated mine and so I pushed back. The call didn’t end well. I suggested that maybe Hertz would like my business and he didn’t like my implied threat.
Lets remember this is over $15 (2.4 gallons of gas - that penalty pricing is steep). I reviewed my last year of rentals. Over 20 of them. That isn’t days rented, that is rentals so my total days exceed 30. At $50 or more per day, there is way more than $15 at stake. I think that Hertz would probably like my business and would probably give me $15 to pay National to smooth my transition and minimize my pain. I found my receipt and it is timed 6 minutes before I turned in the car, so it wasn’t like I filled up across town and tried to cheat them. The customer service agent should have had the ability to resolve this and maybe with less of an attitude he could have.
Why am I writing about this? Well it is to remind everyone that customer service representatives need to have the authority to apply judgment to resolve matters like mine. They should be more like the Ritz Carlton where even the housekeeping team have the ability to spend like two thousand dollars to resolve customer issues. That makes customers happy. I would like to be happy.
I ended the call with Customer Service before it escalated. After 30 minutes, I attempted to call customer service again only to learn that they close at 7 PM. Then I got to thinking. My airline can take care of my needs and wants 24/7/365. So can my hotel chains. Even the IRS is open later than 7 PM. Why isn’t my rental car company? Simply does not make sense to negatively impact your customers. After too many phone calls for tonight, I decided to write a customer comment on National’s website. I received an auto response indicating that they will attempt to respond to my comments within 24 hours. I guess I will wait and see. I am certain that I will not pay the additional charge. Whether I switch my loyalty at this moment is up in the air.
This is really a leadership issue. Leadership needs to provide tools and options for thier customer service teams to resolve issues at the first opportunity. Southwest Airlines does. Ritz Carlton does. Nordstrom does. National does not. I wonder. Maybe if National provided a little more opportunity and authority - I would be happy and praising them rather than pointing out their challenges.
As Baker and I often say, when a customer has challenges, companies need to resolve them to the satisfaction of the customer. The ball is in National’s court. How this ends is really up to them and not to me. I hope they understand why I feel the way they do and resolve it to my satisfaction.
Ron Baker - 12/06/2007
BDO Stoy Hayward in the UK recently issued a report I read several weeks ago, which has been annoying me ever since. It’s titled: Stop the clock?: A research report on fees and value in legal services.
There are some interesting nuggets in this report. There’s also an enormous amount of nonsense, which would take literally a book to refute. I’ll just give you a list of what I found interesting from the report, as well as what I agree with, and finally what I vehemently disagree with.
[Note: This post should be read after reading my post How Much Are You Leaving on the Table Because of Mediocre Pricing, since the main message of this post is law firms are responsible for changing their pricing strategies, not in-house counsel or their customers].
Interesting items from the report, along with my commentary in brackets:
- 82% of in-house counsel believe hourly billing provides no incentive for firms to be efficient.
- Hourly billing accounted for two-thirds of the total annual legal spend of our survey respondents.
- Nearly half of the respondents were dissatisfied with hourly bills and were clear about the reasons why.
- One in ten in-house counsel said hourly billing had no strengths at all, and most were ready to be impressed by an alternative [Law firms: Hint, hint].
- Some organizations are bringing their procurement departments to the negotiating table, believing this will help them to get better value for money [Advertising agencies are already facing this issue, and it’s not pleasant. If you are dealing with professional buyers, then you certainly need professional pricers].
- Fixed fees achieved the highest satisfaction levels, with capped fees close behind. Both levels are higher than the satisfaction rating for hourly billing, but neither statistic is a resounding endorsement. [We needed a study to learn this?].
- Fixed fees was ranked as the best substitute by only one-fifth of respondents. [So what? Customers need to be educated and inculcated to new methods of pricing, and the onus is on the sellers, not the buyers].
- 68% of in-house counsel said they would be willing to pay higher fees for valuable work if they were charged less for lower-value work. Only 4% disagreed strongly with that idea. [We’ve said this for years, using Bill Cobb’s Beloved Value Curve as an illustration: some work is of relatively lower value than others, but the hourly rate treats all work the same. It’s insane, and creates this cross-subsidy system whereby lower value work is overpriced and high value work is underpriced. This is all the result of law firms not understanding value to the customer].
- If law firms are willing to try a value-based approach, many in-house counsel would be receptive. Indeed, 65% said they would like to discuss the possibility of value-based billing with the law firms they use. [Amazing].
- When the relationship with a law firm has broken down, billing is only one of the reasons, [one in-house counsel believes]. “Really it will have been because we were not impressed by the service we received or we were not well understood by the people we worked with. If their bills were cheaper, would I still go back to them? No.” [Research for decades has shown that nearly two-thirds of customers leave professional firms due to perceived indifference. It’s the little things that matter most, and service is primary. Note the answer to her own question! How many times must we repeat it: customers are not price-conscious, they are value-conscious].
Here are items from the report I agree with, along with my commentary in brackets:
- But what about value? If there is a negotiation about value, it often takes place once the final bill has been received, when in-house counsel asks the firm in question to retrospectively justify its charges. Some in-house counsel are happy to work on this basis, others are less so. Either way, our research shows that in-house counsel are keen to engage law firms in a wider debate about the issue of billing. [It’s not a debate, it’s a strategy to capture the value a seller creates for the buyer. Since value cannot be communicated as efficaciously retroactively, it must be discussed before the service is started. Otherwise, how could a value price be set? This is such a basic economic law—and every other industry follows it—it’s truly amazing this is still being discussed with this level of intensity. I come back to a lack of intellectual curiosity among law firm leaders for this sorry state of affairs].
- Two imperatives frame this debate. Firstly, in-house counsel want to talk to law firms about how they can improve the hourly billing model, and whether alternatives might work better. In particular, the charging process should be more transparent and there should be greater certainty about the way in which the total fee is calculated. [The hourly billing model cannot be improved—it is what it is. It’s been around now for over 50 years, quite long enough to figure out whether or not it can be tweaked. It needs to be buried, along with the labor theory of value mindset that is inexorably linked to it. Of course pricing should be transparent, which it is if it is based on value and provided to the customer BEFORE work begins. What’s more transparent than that?].
- Secondly, in-house counsel want to discuss value in the wider sense. If fees are to relate more closely to value, what might that involve? And if in-house counsel want a more value-driven relationship with the firms they use, what might that look like? [It would look like all the other relationships buyers have with sellers around the world. They know the price up-front, and they get to decide, based on a value-to-price relationship, whether or not the value is worth the price. If firm leaders opened their eyes and looked around the business world, they would see what this looks like].
- One respondent complained about a firm that charged for travel time when its office was just a fifteen-minute walk away. A value-focused relationship is one, in his view, where he could phone up a lawyer to discuss an issue quickly and not be charged for it. [This is why we advocate utilizing an “Unlimited Access” clause in all Fixed Price Agreements, whereby the firm’s price includes unlimited telephone calls and meetings. This inevitably leads to Change Orders and is one of the most effective—and inexpensive—methods for cross-selling additional services].
- Mr. Holford [in-house counsel] hopes the system will lead to a “no surprises” culture, where the company can better estimate its legal costs and the claims themselves. That’s an outcome many of the in-house counsel in our research would like to achieve. ["No Surprises” is a cardinal axiom of a Value Pricing culture. Fixed prices offer this as no other pricing strategy can or does].
- There will always be some firms working on an hourly basis, says Mr Given [in-house counsel], but over time “the business model will change and firms will focus more on adding value”. If billing does move onto that more subjective basis, how will in-house counsel decide what they ought to pay? “It’s also the other way around,” he says. “It’s for law firms to work out what their USP [Unique Selling Position] is and to put a value on it. I’m not going to say it will be easy, but it will be increasingly hard to ignore as an issue—it’s not going to go away.” [Amen. Again, it’s up to law firms to change, not in-house counsel!].
Finally, there are statements and conclusions in this report that are utter nonsense. All of them have been refuted in the books written by Richard Reed for the ABA dating back to the early 1990s, as well as my books, among others. The fact that we still have to reiterate these basic laws of economics illustrates how much work we have left.
Here are some of the more annoying passages from the report, again with my commentary in brackets:
- There is a role for hourly rates, fixed and capped fees, value based billing and other structures. The challenge is learning when to use these various methods, developing accepted standards around their usage and capturing the value which legal services bring to organizations. We hope this report will facilitate positive on-going conversations between private practice and in-house counsel which helps to influence and inform the debate on this topic. [It’s hard to believe they conclude that there’s still a role for hourly billing, after their own report shows 94% of in-house counsel complain there’s no certainty over the final cost, or link to value. All of the challenges they mention are the responsibility of law firms, so there should be no “debate” with buyers about this].
- Tradition is taken seriously in the legal profession and tradition dictates that most law firms charge their clients on an hourly fee basis. It is a simple way of working out fees, and in the highly complex world of the law, simplicity should not be undervalued. [Tradition is the democracy of the dead. If a theory is not working, shouldn’t it be replaced with a better one? Clinging to hourly billing because it’s been around for over half of a century is the triumph of hope over experience].
- However, in a climate of rapidly increasing fee rates, hourly billing can also lead to a lack of trust through a fear of overcharging and a growing concern that legal charges do not reflect the true value of the services provided. [No kidding. This lack of trust is severe, a consequence of an incorrect pricing theory. Restoring trust is reason alone for burying the billable hour. Not to mention that hourly billing is unethical].
- Those who have used alternative methods—such as fixed or capped fees—say that while these are preferable, they do not believe that any one of them on their own can, or should, replace hourly billing. Instead, the most popular model involved a menu-style approach, where in-house counsel could influence more control over costs by agreeing to use a billing method that reflects the assignment. [Well, quite frankly, it doesn’t matter what in-house counsel believe. I agree they should be offered various levels of services and price, much like airlines offer anywhere from no-frills coach to first-class tickets. But that does mean that passengers get to have a say in whether or not airlines use Yield Management pricing. This is where law firms lack creativity and vision. Offering a menu of different levels of service and pricing is a rational strategy, but it simply has to be done by law firms, not customers].
- One route many in-house counsel adopt is to challenge the bill when it arrives—as one participant in our research put it, “to negotiate value after the event”. Some in-house counsel are happy to have this kind of discussion with their legal advisers. Mark Harvey, in-house counsel at Help the Aged, says he typically works this way, receiving an hours-based bill from a firm and then asking what they actually propose to charge. “We’ll agree something at the end,” he says. Does that make for an awkward relationship? Apparently not. “It’s not haggling, it’s negotiating.” Mr Harvey says he is generally happy with the value he receives, and focuses on quality of service more than anything else. [Pricing is not negotiating, and once cannot communicate and convince customers of value retroactively. This is insane. Value must be discussed up-front, period, so the customer can compare value to price before they purchase, not after. A service needed is always worth more than a service delivered, for the same reason an apple today is a different product than an apple tomorrow. Why would lawyers want to price in arrears?].
- Les Todd, in-house counsel at Newcastle Building Society, would rather establish a clearer link between fees and value from the start. “I do not like receiving quotes which turn out to be totally unrealistic,” says Mr Todd. “In certain circumstances the quote may be exceeded, but I do not accept this as a fait accompli, and generally find that constructive discussions need to take place to ascertain whether the increase is justified.” [Precisely why we advocate utilizing Change Orders where price and scope are authorized up-front, along with Fixed Price Agreements].
- Any negotiation over value, whether entered into when the bill arrives or when the work is assigned, begs the question: what is value? The majority of survey respondents and interview participants want a better link between fees and value, but their understanding of what value means in this context varies. [That’s because value is subjective, and depends on context. A bottle of water is worth far more to a man about to die in the desert than it is to a man washing his dog, or to a man with water flooding his basement. If we want prices to be better linked to value, I can tell you one way not to do it, for sure: discuss hours. If law firms don’t discuss value, procurement or in-house counsel will force them to discuss costs, inputs and hours. The choice is yours].
Much more could be said about this report, but this post is already too long.
Suffice it to say, let me be clear: Sellers are responsible for innovating new pricing paradigms, just as lawyers did when they started using hourly rates (customers never asked for it, it was thrust upon them).
Law firm leaders need to lead the change, and visionaries such as Chris Marston of Exemplar Law Partners and Jay Shepherd of Shepherd Law Group are blazing the trail other firms will inevitably follow.
One last comment: Physician, heal thyself. BDO Stoy Hayward is an accounting firm mired in the mentality that it sells time. It would be nice to see them bury the billable hour along with their law firm brethren. I won’t hold my breath.
Ron Baker - 12/06/2007
Several years ago, Senior Fellow Paul O’Byrne came to California and taught two CPE courses for the California CPA Education Foundation: Mind Mapping: An Accountant’s Mind Unleashed..
They were fantastic courses. Dan and I still receive comments from people who went through them, and now use mind maps religiously.
When I first met Paul in March 2000, I was giving a talk in Stratford-upon-Avon [birthplace of William Shakespeare] and Paul was in the audience mind mapping my presentation. I had seen people do this in the UK, but never in the states.
Afterward, he showed me the mind map of my talk, along with one by David Maister, Tom Peters, and others. It made complete sense, since it conforms to how our mind remember things.
Reading this recent article on using mind maps from AccountingWebUK made me think about that first encounter with Paul. My life hasn’t been the same since.
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