Community Section -
Ron Baker - 01/31/2008
In the aftermath of Enron and other assorted accounting scandals of 2002, there has been a lot of discussion about the trust factor in the professions. Terms such as the trusted advisor have become common in mission and value statements at firms.
In fact, many firm leaders seem to believe that trust is a core competency of their profession. I have a different perspective on this issue, which I have learned is very controversial (when sharing it with many colleagues it ignites quite a debate).
There is no doubting the importance of trust in business relationships. In fact, the accounting profession, for instance, owes it origins to this very issue, since, from the late fifteenth century on, businesses that were originally based on kinship and family ties grew to a size that made it imperative to hire outsiders. In addition, as personal finances became further separated from business finances, double-entry bookkeeping became a necessity in order for the principals of an enterprise to monitor the agents they hire.
In any economy, a high level of trust acts as an expedient to commerce, reducing the need for lengthy negotiations, protracted contracts, and costly litigation, or what economists refer to as transaction costs. Nobel Prize-winning economist Kenneth Arrow explains the function of trust:
Now trust has a very important pragmatic value, if nothing else. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. Unfortunately this is not a commodity that can be bought very easily. If you have to buy it, you already have some doubts about what you’ve bought. Trust and similar values, loyalty or truth-telling, are examples of what the economist would call “externalities.” They are goods, they are commodities; they have real, practical, economic value; they increase the efficiency of the system, enable you to produce more goods or more of whatever values you hold in high esteem. But they are not commodities for which trade on the open market is technically possible or even meaningful.
With high levels of trust, commerce is more fluid and transactions costs can practically be lowered to zero, as economist Thomas Sowell points out in Race and Culture:
Commercial transactions that require trust and reliability are more readily concluded among people who share not only certain traits, but whose possession of these traits can be verified more easily. An extreme example of this are the Hasidic Jews of New York’s jewelry industry, who give each other consignments of precious gems to sell, without the need for contracts or other costly safeguards that would be absolutely necessary if dealing with strangers. Lebanese traders in the interior of Sierra Leone likewise have had to depend on the honesty and reliability of other Lebanese traders in the port city, who sold their consignments of produce in the international market and shared the proceeds. The Chinese in Southeast Asia have also been noted for the large and complex transactions which they conduct among themselves without written contracts.
You can’t purchase trust; it is a table stake in a free market economy, and not just for professionals, but for all businesses. All transactions require trust; it is a basic expectation when conducting business. It certainly is not a core competency, because it is not an attribute you can do better—or at lower cost—than your competitor.
Trust is complex and, obviously, there are different levels of trust, as it is a contextual concept. It is one thing to purchase a pack of gum at a convenience store, or get a shave from a barber, and quite another to trust a babysitter with your child. But it is a mistake for any firm to advertise or market its trustworthiness; it is frankly something that must be demonstrated and earned (one way to accomplish this is to offer a money-back guarantee on all of your work). Merely having trusting relationships with your customers does not ensure they will remain loyal.
I fly quite extensively on United Airlines; I trust them with my life, which certainly requires a higher degree of certainty and confidence in a complete group of strangers than in my accountant or lawyer. In the airlines, safety is simply a table stake—it is necessary, since it is hard to sell anything to a corpse—but it doesn’t ensure customer loyalty, or even profitability.
If United’s service ever begins to decline, I will defect. We witness the same response among customers of professional service providers. Moreover, no airline would advertise: “Fly with us, we won’t kill you.”
The majority of transactions that take place in the world-wide economy are done under an umbrella of trust. Professionals are among the most trusted advisors. So what? This is a subtle point, but an important one. The professions—or any firm therein—does itself no favors by continuously trumpeting its level of trust. Like your technical quality, it is merely a table stake. Those who talk about it, injure it, and are perceived less believable.
Your reputation, like trust, is based on what other people say about you.
Certainly you can lose customers if they lose faith or trust in you—and usually, like husbands, you will be the last to know—but that is not the reason the majority of customers defect from their professional. As we know, most defections occur over the service experience, not issues of integrity and trust.
I cringe when I see a professional’s business card, Web site or brochure that touts “trusted advisors.” It makes me want to immediately count my spoons.
Ron Baker - 01/31/2008
A few years ago I received a telephone call from a guy who wanted to talk to me about my book.
I remember the call well, as I was sitting in a New York hotel when we finally connected. He began by telling me how much he enjoyed my book, Professional’s Guide to Value Pricing, along with a lot of flattery I’m too embarrassed to repeat.
He also told me about a pricing success story he had had, which obviously convinced him to become a Value Pricing convert. Since then, we’ve exchanged occasional emails, he has written a fantastic book, How to Build and Manage a Family Law Practice, and a White Paper, “Dumping the Billable Hour: One Lawyer’s Experience.” He’s also written other recognized books.
Well, I finally got to meet Mark Chinn at the Atticus Value Pricing Workshop in Orlando, Florida. He told the entire group that he’s made over $500,000 more utilizing Value Pricing than he would have made billing by the hour, in the last couple of years. He knows this because he still maintains timesheets.
I said it was time to take the training wheels off, as Mark’s firm, Chinn and Associates, PLLC, has obviously made pricing a core competency, along with the practice of family law.
He said he was going to go back and trash timesheets.
Mark is an incredibly nice man, and I’m honored to have had the chance to meet him. Though I’m sure I’d never want him in the courtroom against me, he is a true gentleman. Poke around his Web site and you can see for yourself his accomplishments, philosophy and purpose. He even has a description of Value Pricing. All very impressive.
Family lawyers are litigators. And to all those attorneys out there who think litigators can’t offer fixed prices, Mark is empirical evidence they can. There are now other family law practices out there doing the same thing. So much for “it can’t be done.” Usually, people who say that are being bypassed by people who are doing it.
I’ve always had tremendous respect for attorneys. I do believe it’s a noble profession. The lawyers I’ve had the privilege of working with are smart, well-read, excellent debaters, have respect for abstract ideas, and cogent thinkers. I always learn much more from them than I impart to them.
Congratulations, Mark! Your Team’s progress has been amazing this past couple of years. I am honored and humbled to have played a role, no matter how small.
Who knows, after a while living without timesheets, we may see your picture on the Fellow page of this Web site.
I hope so.
Ron Baker - 01/30/2008
Stephanie West Allen over at Idealawg is better than any RSS feed. She always sends me great posts.
This one is from The Greatest American Lawyer. I showed it to a group of lawyers this past Saturday at the close of a Value Pricing Workshop. Gotta love this:
But there is one thing that stands out most from my presentation. It was how true it struck when I said the words “as bad as hourly billing is for clients, it’s worse for lawyers.”
The room was filled with silence. No one said anything. But I doubt anyone disagreed. Let me say it again. As bad as hourly billing is for clients, it’s worse for lawyers.
To live your life as though each minute spent doing something else besides billing the client was a wasted moment is a waste of life.
You know the feeling I’m talking about. Your wife calls. She’s telling you about some otherwise seemingly trivial part of her day (which is a huge part of her day) and you’re thinking about the fact that you’ve only got four and half hours in today and already four o’clock. You’re trying to be polite at best, but mostly you’re trying to get back to your hours.
Imagine a life where each hour was measured exactly the same. It sounds like communism to me. It doesn’t matter how hard you work or the quality of your work, you get paid the same. If capitalism is all about incentives, then we cannot help but pose the most fundamental question of all. What is the incentive of the billable hour?
Amen. VeraSage is responsible for illustrating the link between the billable hour and Karl Marx’s Labor Theory of Value.
It is a form of communism, with the incentives being misaligned between lawyer and customer. For a profession that prides itself on its ethical duties of representing the customer to the best of its abilities, it amazes me that it utilizes a pricing method which violates that very spirit.
As economists say, incentives matter—the rest is commentary. This is why you never see anyone wash a rental car. To think otherwise is to deny economic reality.
Isn’t past time to align the incentives and bury the communistic billable hour?
Ed Kless - 01/30/2008
In September of 2007, Rob Lewis of Accounting Web UK published a defense of the billable hour. Ron Baker responded with a post here. On both sites there was much commentary, some of it by this writer, not all of which I am most proud. (Let’s just say it got a little ugly.)
Today, however, we have a redemption of sorts. The same Rob Lewis has dubbed Ron Baker the Eye-opener for his Who’s who for 2008. I commend both Rob and Ron for their efforts in driving the dialogue forward.
Three cheers, gentlemen!
Ron Baker - 01/30/2008
One of our favorite Key Predictive Indicators at VeraSage is the HSD—High Satisfaction Day.
Nothing gives us more HSDs than receiving an email like the one I did yesterday. Even though my computer’s hard drive crashed in the morning, which is a lousy way to start the day, getting this email from Brett Kreykes makes it all worthwhile.
Ron,
Keep up the great work at VeraSage! You have been inspirational to me and my small I.T. Consulting company! Indulge me, if you will, in my “story.”
Five years ago I journeyed out on my own as an independent I.T. consultant. I was billing by the hour and things were going pretty well for me. After 2 years I was very busy with small to medium sized companies and residential work. I soon discovered that I was unable to grow my income due to the limited number of hours in a week. How terribly depressing! I wondered for days if I was going to be ‘stuck’ at a fixed income. I didn’t know how to address outside of raising my rates, but I didn’t think my customers would put up with that for long.
After seeking out advice from those wiser than myself, a friend of mine introduced me to VeraSage and I dove head first into the 3 ACCA Booklets available on your website. I immediately knew FPAs were the solution. I continually had situations in my work that bothered me. When one customer had a new problem, it might take me 3 hours to fix it. A second customer then had the exact same problem, which I could solve in 10 minutes. This was really unfair to the first customer and to me! Now, realizing that selling knowledge/skills (and not time) would remedy situations such as this!
I introduced my first FPA to one of my larger customers, which they warmly received. My fees increased 50% without having to do any more work! As my hourly based contracts expired, I introduced FPAs to my remaining customers. I occasionally received some resistance, but nothing unbearable. Once my customers understood how an FPA would benefit them, they soon saw the value of a FPA.
Now, the beautiful part of it. I’ve been firing customers, specifically all of my residential customers and business customers who were not good customers. I now have more free time, less stress, and I can better take care of my FPA customers and provide a higher level of customer service. Now, if any business wants to ‘hire’ me, I sit down with them and determine their needs. If the engagement is not worth at least $10,000 a year, I pass. This way I ensure of having customers who are as committed to me as I am to them.
I have never enjoyed work so much as I do now. I earn a fantastic wage and I don’t have to work myself silly. I even get paid sick days, holidays, and vacations now! (try that with hourly billing) My family life has even improved as I now have more time for my wife and children.
Ron, you and VeraSage have made a huge difference in my life, and I want to say “Thank you!” As comical as it is, my friend who first introduced me to VeraSage has yet to get his CPA firm utilizing FPAs. I brag about my success to him all the time and continually remind him of all the money he’s leaving on the table. It drives him nuts.
Best wishes for the future!
Brett Kreykes
Kreykes Consulting, Inc.
Thanks Brett. Nothing is more humbling, nor more inspiring than hearing stories such as yours.
Value Pricing works, and to all those cynics who say it can’t just read all of our Trailblazer stories. This is empirical evidence from the real world.
It also illustrates that Value Pricing is not just about pricing. It’s a business model. It changes everything about a firm, from shifting your thinking that you sell time to thinking you sell intellectual capital. It impacts how you treat customers, how you select them, communicate with them, and more.
When we say “all this we do only for the price of seeing you, our colleagues, succeed,” we truly mean it. This type of confirmation of our work is priceless because it furthers the posterity of the professions.
Congratulations Brett, and continued success in the future!
As a follow-up, I asked Brett if he trashed his timesheets. Here’s his response:
Ron,
I did in fact dump my “timesheets”...what a sheer joy that was in and of itself. I didn’t have sophisticated software, I tracked my time using Microsoft Outlook’s calendar. At the end of every month I would then manually transfer it into QuickBooks so I could do my billing. It was an awful process that was tedious and prone to human errors. I’m glad that ‘chapter’ is done!
Thanks again!
That’s worth another HSD!
Ron Baker - 01/29/2008
Robbie Vitrano is Principal of Trumpet, a “brand studio” that does strategy, content, digital, design and media.
He has an interesting post titled “Marketers, Agencies, It’s Time to Play Nice in the Sandbox.” Here is what he has to say with respect to agency compensation:
We know the root of the problem is the cost-based compensation model, thanks to comp-ikaze (VeraSage Institute Founder) Ron Baker. Following the lucre has spurred bad practices and a deteriorating relationship because it focuses on the wrong things: “efforts, activities and costs. It does this at the expense of the right things—outputs, results and values. It misaligns the economic incentives on each side. The client pays whether the agency adds value or not, and the agency is paid a fixed amount regardless of the value it creates.”
Wow, I’ve never been called a “comp-ikaze” before, but I like it!
Robbie goes on to discuss the importance of agencies owning their own intellectual property, a concept that the 4As has been working on, as well as some innovative agencies such as Anomaly:
Next, we need to have a conversation about intellectual property, revenue share, performance-related fees and, gulp, equity. Yes, that is hard to do. Yes, that is what must be done. I mean, assuming you want to end the moaning and do it right. Everybody says they want to. Do you have the guts? Well, do you?
I also love how Robbie quotes one of my heroes, the Austrian economist Joseph Schumpeter, famous for his lyrical line, “creative destruction”:
This disconnect is perhaps a result of fear. When we kill the fear, we’ll make room for innovation and optimism. To bludgeon Josesph Schumpeter’s famous economic principle, “creative destruction,” to get something new, you have to lose something old. I vote it be fear.
I second that vote. Fear is what largely keeps both agencies and marketers mired in the mentality that time equates to value. It’s the wrong theory of value, as we’ve proven over and over. But fear of having a discussion over value is what is perpetuating the status quo.
We hear it all the time. Value is subjective. Different people within the marketer value agencies differently. How can we measure the value? On and on it goes.
Our response: so what? Yes, value is subjective, very difficult to define, let alone measure (I doubt if it can be measured; it has to be judged). We’re not talking particle physics here.
But I do know how not to discuss value: talk about hourly rates, FTEs, and overhead costs compared to spurious benchmark data of dubious compensation consultants. You’ll never get to value looking at this data.
Sure, this stuff is easily measurable. So what? It has nothing to do with results and value. As they say, it’s easier to count and cost the bottles than it is to describe the wine.
I recently read a new Peter Drucker book, which is actually a collection of his older articles. In the chapter “What Is a Business?” he says this:
There is only one valid definition of business purpose: to create a customer.
Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are ‘costs.’
Read that again, especially you agency folks.
How in the world did you ever get the idea that what you do is a commodity? You are a vital part of any organization’s value-creating capability. Why you think you—of all the PKFs we deal with, from accounting to IT—are commodities is one of the world’s eight wonders. Oh sure, your customers want you to think that, but they don’t believe it. At least not the astute ones. Agencies are an integral of any company’s social capital.
Robbie then mentions Anomaly in this context:
Recently I was talking to a couple of agency people, including Mike Byrne, partner-creative chief at Anomaly, about goals. One guy said he wanted a shortlist of great clients. Amen. But Mike threw paper to his rock and said, “I don’t want any clients, just business partners.” Damn. Isn’t that the right idea? Commit to the possibility. He’s talking about sharing risk and reward—bringing cultural insights, communications processes and products together with another’s entrepreneurial vision, manufacturing expertise, distribution might or R&D skills to develop a business idea. Help it build momentum and attain cultural influence.
I only have one exception with Robbie’s post. He says the client-agency relationship has to be reinvented. Together.
I disagree. I think the onus is on innovative agencies to offer their customers real choices in alternative compensation. I’ve written before that sellers, not buyers, change pricing paradigms. Agencies can’t abdicate this responsibility by waiting for marketers. They must innovate themselves. Anomaly, Crispen Porter, Ground Zero, among others, are already leading the way.
It doesn’t take comp-ikazes, it takes creativity along with the willingness to take risk—the source of all profits. Innovative agencies will lead the way, eventually changing the compensation paradigm based on one that rewards value over efforts.
I have a strong feeling Trumpet is one of those agencies, based on the thinking behind Robbie’s post.
In the meantime, I and my colleagues at VeraSage will continue our “comp-ikazes” role until we reach critical mass.
Thanks for the new moniker Robbie!
Ron Baker - 01/28/2008
This past Friday and Saturday, Chris Marston and I had the pleasure of conducting a workshop on Value Pricing for Atticus. The attorneys in the audience were a mixed group: some were family law firms, others litigators, and others still estate lawyers.
When any PKF offers fixed prices, utilizing Value Pricing, scoping the project is essential. We strongly suggested Ed Kless posts on this subject.
When Chris was asked how he scoped a project, he drew these concentric circles.
This forces a firm to think about what they know for sure is going to happen—the Yes circle. Since the PKF is the expert, they should know, at a minimum, the work that needs to be done in the first phase. If they don’t know this, perhaps they don’t know enough about the customer’s objectives to be able to handle the project. Everything can be broken down into phases. Mechanics will sometimes charge a price just to diagnose a car’s problem, or a doctor will charge for a biopsy. The same logic applies here.
Next, the firm should consider those elements that are Likely to be required. These are tasks with a high probability of being required to be performed.
After that, the firm should consider those things that might be needed—the Maybe items. This is where the process, from a pricing perspective, becomes creative, for it allows firms to begin offering various bundled options. Using the American Express Green, Gold, Platinum, and Black credit card analogy, a firm only scoping the Yes items could offer a Green card price—a stripped down value proposition. This may be strategic if the customer is price sensitive.
Value Pricing isn’t just about offering higher value and prices. It can also mean a lower price, but always for a lower value. There should always be a trade off required from the customer. Moving beyond the Yes factors to the Likely factors could produce a Gold Card service option, at a higher price; including the Maybe factors would bring a Platinum card price. Not only are you offering various levels of comfort, you are also providing insurance to the customer against risk.
This is significant because people will pay “premiums” to avoid risk—it’s what insurance companies are all about. The PKF is able to spread this risk over many customers, yet the customer usually only deals with one lawyer at a time, so the risk to them is much higher. Reduce that risk and you earn a price premium. It’s similar to fixed-rate vs. variable rate mortgages. The higher interest rate isn’t because it cost the bank anymore to process a fixed-rate loan; rather, it’s for the reduction of risk to the customer.
Since profits come from risk, this is an opportunity for a PKF to make supernormal or windfall profits.
If the firm can actuarially assess the risk of not only Maybe factors, but then step beyond to cover what Chris calls “Who the Hell Knows (WHK)” factors, then it is offering an insurance premium with umbrella coverage for contingencies. Some customers will value this ultimate peace of mind and be willing to pay for it—the Black Card in American Express lingo (the Black Card is a $2,000 per year credit card that comes with a 24/7/365 concierge, frequent flier miles, and other perks).
Placing the project into Phases, with creative scoping, leaves the opportunity for Change Orders when the scope changes. Once the professional is approximately 80-90% done with Phase 1, they can begin to scope Phase 2. The important point here is to discuss, price, and get authorization from the customer for Phase 2 BEFORE you are done with Phase 1. This maintains the firms leverage as well as leveraging switching costs.
This method of analyzing scope applies to all PKFs, from Advertising Agencies to software VARs. Give your customers options. So many professionals get hung up that they are unable to forsee all the contingencies of a job. So what? If you feel anxious about that risk, imagine how your customers feel about it.
So do what the insurance companies do. Use that risk actuarially and turn it into an opportunity to create and capture more value. Give your customers the option of choosing what level of risk they are comfortable with. Since risk is like price—it is completely subjective, different for each person—some customers won’t value avoiding it while others will.
Profits come from risk. Chris’ scoping circles will help you analyze risk in a structured, logical manner, allowing you to absorb the level of risk you’re comfortable with. As with pricing, this is a skill—the more you do it, the better you’ll get.
Actuaries price risk for a living. If PKFs can develop a competency in this skill, they will be able to differentiate themselves in the market from their competition, as well as capture more of the value they create. That’s the ultimate win-win.
But it takes the ability to think, take risks, be creative, and imaginative. This is precisely why most firms don’t do it, it’s too hard. As Ed Kless says, if you suck at what you do, by all means price by the hour.
Most professionals do this because they are afraid of scope changes. Chris Marston just provided you a way to avoid that fear, while adding tremendous value.
Do you have the guts to put it into practice?
Ron Baker - 01/28/2008
Thanks to Stephanie West Allen for passing along the Memphis Business Journal article from Friday, January 25, 2008, ”Memphis attorney goes to task-based billing, but don’t expect local trend.”
The article talks about Scott Ostrow, a business litigator, who has decided to move to “value billing” or task-based billing. We at VeraSage make a distinction between “billing,” which happens after the work is performed, and “pricing,” which takes place before the work is begun.
Ostrow thinks lawyers have a public perception problem largely because of the billable hour. This is true. The billable hour misaligns the interest of lawyer and customer right from the start of the relationship, keeping the customer in a constant state of panic over whether or not the attorney is padding hours. Not to mention customers don’t equate value with efforts. Do you care how long it took Porsche to build your car?
The article quotes Lucian Pera, an attorney with Adams and Reese LLP, who says that although timesheets are a hassle, “in the grand scheme of things you get used to it.” This is not exactly how mankind progresses. “It’s hot in the south, but you get used to it,” would never have inspired the creation of air conditioning. The article goes on:
Pera believes “clients can be badly served by all methods” and is skeptical about value billing.
“The value is in the eyes of the beholder,” he says. “Not all depositions are worth $500; some are worth more, some less.”
He says that, hypothetically, hourly billing could vanish quickly from the legal landscape.
“If clients wanted, they could end it tomorrow,” Pera says.
Yes, value is in the eye of the beholder, and not all depositions are worth $500. So what?
The whole point of Value Pricing is to engage the customer in a discussion, up-front, to get an idea of how much they value something.
Hourly billing means undercharging for some work while overcharging for other work. Value Pricing removes this built-in subsidy.
Pera’s contention that clients could end hourly billing tomorrow is not going to happen, nor should it. As I’ve written before, sellers make pricing changes, not buyers. Once firms make the change, customers will defect to those firms that provide certainty in price.
The most obnoxious line in the article, however, comes from Tom Clay, principal of Pennsylvania-based Altman Weil, Inc, a consultancy firm. After citing surveys that show 90-95% of law firms still bill by the hour, Clay says:
“Value billing is hard to communicate to clients,” Clay says. “Who calculates that value? Clients’ views may not be consistent.”
Again, so what if customers views aren’t consistent. And consistent with whom? The law firm? Or other people in the customer business? (Clay is irritatingly unclear on this).
So, because value is hard to communicate we shouldn’t do it? But prices are determined by value. Businesses would be suicidal not to try to comprehend value when determining prices.
One wonders when Mr. Clay would like law firms to learn whether the customer had a different perception of the value of the work: Before or after the work has been done? At least if the firm learns before, they can make adjustments. If they learn afterwards, they have an unhappy customer who will inevitably spread ill will about the firm.
Is this that difficult for a consultant to understand?
I wish Steve Ostrow the best of success with his new business model. It proves there are some professionals who understand the importance of innovation and who aren’t sitting around waiting for their customers to make a change. Innovation is the responsibility of businesses, not customers.
Those who don’t innovate deserve to die.
Ron Baker - 01/23/2008
AccountingWeb is running a series of three excerpts from Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth.
The first article was published on January 18, 2008.
The second article was published on January 27, 2008.
Finally, the third article was published on February 4, 2008.
Although it was difficult to select three 1,000 word extracts to summarize a 300 page book, I hope it gives readers a good idea of the book’s main thesis.
Ron Baker - 01/21/2008
Ron Baker - 01/21/2008
Matthew Tol began to correspond with VeraSage back in November 2006. He made the decision to trash timesheets June 30, 2007.
He recently sent us an update on his progress, which has been fantastic.
Ron,
As we corresponded early last year, I though this might be a great time to update you—we have thrown out timesheets, moved all clients on to fixed agreed fees with monthly billing and direct debit, all new projects and work is priced and signed off when it comes in and before it gets started and we’re going along very well! Talking with a number of my colleagues around Australia, they just don’t seem to “get it” and haven’t the guts or courage to make the move that is required to move them in to the 21st century. They get frustrated but the terror of the unknown is bigger than their level of frustration.
Just had an interesting discussion with one of my colleagues in town this morning—whining about how much time he didn’t have. Issues with staff and he did not sound at all happy. He is still on paper files, no scanning that works, no systemised process for bringing in, processing or sending out work, timesheets that take up a heap of time, client fee resistance,debtor problems and I think his cashflow would be dead. I spoke to him about what I’ve invested in over the past five years—we may as well have been comparing different businesses (sorry, my business and his corner shop)!
Keep up the great work—I’ve tried it, gone through the issues and have “seen the light"—to use the phrase from “Mr T” in the “A Team"—"Pity the fool” who doesn’t have the guts to change that which isn’t working.
Trust you and yours enjoyed a wonderful festive season and the new year is a terrific one for you.
Kind regards,
Matthew
Matthew Tol
Principal
matthew tol + associates
24 Doveton Street North,
Ballarat Vic 3350
http://www.mt.com.au
Congratulations Matthew. More evidence that trashing timesheets is the wave of the future that can be done—if firm leadership is willing to pay the price of casting off yesterday and embracing tomorrow.
Ed Kless - 01/21/2008
Eric Fetterolf asks:
I wonder if the root of the problem (cost-led pricing and keeping timesheets) is not lack of vision or education. I wonder if the problem actually exists at a deeper level — the law.
Employers are required to pay employees the hours they work. That is why firms that make time cards, physical and software based, are successful. Employees are not paid by the result, but by the punch time clock. Since the law is rooted deeply in the fundamental Marx theory of labor, (isn’t that a shock that the American labor laws are guided by Marx), is it really a mental stretch to see why many firms are struggling with the transition? They are being held to a flawed standard by our government.
The question for the court of public debate: Are we simply attacking a virulent symptom and not the true underlying root cause?
Eric, you are correct in your assessment that most labor laws are derived from Marx and that this is certainly a problem. However, from my (amateur) understanding of the law, this does not force companies to keep timesheets. I know that most companies are required to keep attendance records for exempt employees, but this does not mean that they have to pay by the hour. It certainly does not mean that they have to price and then bill by the hour.
Any other thoughts from the community?
Ed Kless - 01/17/2008
Today is sure a busy day at the VeraSage Institute. First, Ron slaughters a consultant, to which Paul O’Byrne posts a response and now, an announcement that RainToday is conducting a survey on professional service (sorry their word, not mine) firm pricing.
It is incumbent on all VeraSage thinkers to please spend the 20-minutes filling this out. The survey can be found at --> http://www.surveymonkey.com/s.aspx?sm=uJMDeOD9q69m3HT6VG3RIQ_3d_3d.
In return, RainToday will provide you with a copy of one of their more popular reports. I have read most of them and they are quite good. Here is the list:
- The Professional Services E-Guide To Online PR (PDF)
- How To Write And Market A White Paper E-Guide (PDF)
- How To Become A Thought Leader E-Guide (PDF)
- How To Set Appointments Through Cold Calling E-Guide (PDF)
- Marketing Strategy, Planning, and Budgeting for Professional Services (Webinar Recording)
Please take the time (thank God you don’t have to fill out a timesheet) to fill this out today.
Ron Baker - 01/17/2008
David Connell is a consultant to accounting firms in Australia. I debated him back in 2000 while I was touring with Paul Dunn. He recently wrote about the timesheet debate in his newsletter, with not very pleasant comments about Yours Truly (though he never named me, but you can judge for yourself who he was referring to).
Well, as you know, VeraSage loves a good debate, since we take our Quest of burying the billable hour and timesheet very seriously. In that spirit, I wrote the following letter to David today.
We will see if he responds. In the meantime, I’d love all our Fellows to weigh in on this debate, and make points I inevitably missed.
Buckle up, folks, this is a high speed ride, not for the faint of heart.
January 17, 2008
Hello David,
I’m sure you remember me, we crossed swords many years ago, regarding firms trashing timesheets, after a series of presentations I gave in Australia on Value Pricing.
It’s sure nice to see your Nov/Dec 2007 newsletter, “Future Directions and Practice Solutions,” where you admit that “value pricing is the direction that many if not most firms will take in the years ahead.”
Since I’m the person who put Value Pricing, Fixed Price Agreements, Change Orders, and Trashing Timesheets on the map around the world in what we at VeraSage Institute call Professional Knowledge Firms (PKFs), that’s a nice tribute to my work. Thank you. I’m happy to see the consultants to the profession down under, such as Andrew Geddes, Dave Smith, Rob Nixon, among others, finally join the parade, even if they are trying to get in front of it.
However, I notice that your thinking hasn’t evolved since our debate years ago, nor have your colleagues mentioned above. Ours has. It’s obvious you haven’t kept current with our work, the books I’ve written since, or all of the firms that have trashed timesheets since then—quite successfully I must say.
Just so you’re clear what I’m responding to, I’m going to quote you at length:
“Just be sure that you have the basics right first and by this I do mean making sure that your timesheet system in particular is properly used with ALL staff and partners having a clear understanding why. Readers will be very aware of my views in regard to maintaining a proper costing/timesheet system. Whilst ‘throwing timesheet systems out’ sounds like a marvelous idea it often means throwing the baby out with the bathwater. Don’t fall for the over simplistic advice to get rid of timesheets by one or two (very much in the minority) so-called Yank experts/authors. By all means let me have your views on this important subject—to date I have received many, many responses—all positively in support of this view.”
I understand the positive responses you’ve received; after all, the tailless dog often praises taillessness. But you are conveniently ignoring a plethora of contradictory evidence, which can’t be dismissed by labeling my argument “simplistic,” or me a “so-called expert,” or even a “Yank.”
You see, David, there are over 500+ firms around the world that have trashed timesheets, across all PKF sectors—advertising agencies, consulting firms, IT firms, accounting firms, and law firms. These are black swans to you, because you think all swans are white. Your theories cannot explain these black swans. Many of these firms are the most profitable firms in the world. (For an understanding of what I mean by the metaphor of black swans, see Nassim Nicholas Taleb’s book, The Black Swan—that is, if you’re still reading).
For someone who believes Value Pricing is the wave of the future, I’m amazed that your thinking hasn’t evolved beyond the timesheet. It’s obvious that you haven’t innovated a new idea for running a firm since the Soviets launched Sputnik. Do you not have any intellectual curiosity at all about how these firms have achieved what even you yourself call a “marvelous idea?”
Let me attempt to educate you. I see from page 1 of your newsletter you are a fan of Toyota. So am I. Are you aware that Toyota does not have a standard cost accounting system? If you’re not aware, I suggest you read Profit Beyond Measure, by H. Thomas Johnson, an accounting professor who studied Toyota in depth, as well as launched the Activity Based Costing movement with his earlier book, Relevance Lost. You see, if you utilize price-led costing (what Toyota calls Target Costing, part of its famous Toyota Production System) you don’t need to have standard, average cost, cost accounting systems.
Timesheets are no different. Timesheets cost by using average, not marginal or incremental, costing, an egregious error that leads to pricing mistakes. They are lagging indicators, yet firms need leading indicators, an enormous difference that you don’t seem to address at all, except that you cling to your benchmarked lagging indicators of realization, hours, etc. Not to mention that being a more accurate cost accountant does not make one a better pricer. Only understanding value and economic price theory does.
I refute every one of your arguments for maintaining timesheets in my books, The Firm of the Future, and especially, Pricing On Purpose and Measure What Matters to Customers. Have you read any of these?
Now, the difference between you and me, David, is when I read, hear, or see something that contradicts my firmly held beliefs of the way the world works, I will thoroughly investigate it. If empirical evidence proves there’s a better way, I will admit my error and change my mind. What do you do?
Apparently, you dismiss the evidence because it’s from a Yank, or because it’s just a minority of firms that do it. But that’s not how science, economics, or business management progresses. Wisdom and truth are not determined by seniority, nor majority vote.
Under your logic, the fact that only a few automobiles were made in the early years of the combustion engine was proof the buggy whip manufacturers had nothing to fear. The fact that vacuum tubes were at the apogee of their market penetration was proof the transistor was just a fad. But the efficacy of new technologies, theories, or management ideas are not determined by how many people are using them, but whether or not they work—it’s the availability and efficacy, not penetration, that counts. It’s not a show of hands, majority vote process.
Technically, it’s called diffusion theory. And with respect to new theories, it can take decades, generations, or even centuries, before a population accepts them.
For example, germ theory took nearly 100 years (some scholars say centuries) to diffuse within the medical profession, and that was the simple idea that doctors should wash their hands between examining patients. The fact that a majority of doctors did not believe this theory, or abide by it, did not make it wrong. Nor did it mean that by following its precepts, they would have been throwing the baby out with the bathwater. It does means their thinking and efficacy would have progressed the sooner they accepted the theory.
So, you may ask, what replaces timesheets—that stale and putrid bathwater you insist firms continue marinating in? Here’s the answer:
- Price-led costing
- Project management
- Key Predictive (not performance) Indicators
- After Action Reviews
- Before Action Reviews
- Fixed Price Agreements, Change Orders
- Chief Value Officer and/or a Pricing Cartel
The advantage of these methods are they actually enhance the intellectual capital of a firm, something I don’t see mentioned at all in your work. If you are not familiar with these methods, you have some serious learning to do. You also have some serious thinking to do.
Today, and for the last 50 years, accountants live and operate in a knowledge (or intellectual capital) economy, not an industrial or even a service economy. Do you know the difference?
Knowledge workers own the means of production, unlike in the Industrial Era where, say, Henry Ford owned the means of production and workers had to work to the rhythms and cadences of an assembly line. According to the World Bank, and other economists who study human capital, 75% of a country’s wealth resides in the head’s of its people. This is true at a macro level, and at the micro level of an accounting firm. My latest book, Mind Over Matter, explores this topic in tremendous detail.
Another difference between a knowledge worker and an industrial or service worker is this: We don’t know how to measure their “productivity.” All the metrics you cite—realization, utilization, hours, etc—are inadequate to measure the effectiveness of an accountant because these only measure inputs and activities, not results and value.
You cling to these metrics because you know nothing else and they can be easily measured. But weighing ourselves more frequently, or accurately, doesn’t change our weight. The fact is, we don’t know how to measure the efficiency of a knowledge worker because we can’t see what’s going on inside their heads. We have to discern it from the quality of their work. It requires judgment, not measurement.
Someone can look great on a timesheet, but have a lousy customer service attitude, perform work so sub-standard it has to be redone, or be disruptive to colleagues. So what good is measuring hours logged on a timesheet? Do you think you can measure the value of a Picasso, the deliciousness of a meal prepared by a five-star chef, the splendor of a building designed by an architect, or the acting ability of an actress, by looking at the hours they work? As they say, it’s easier to count the bottles than describe the wine. You remain mired in counting and costing the bottles, while we are interested in the quality, taste and subjective value of the wine.
Knowledge workers aren’t inspired to track every six minutes of their day. No one entered this profession with the objective of logging the most hours. Not only is it the wrong theory of value, it’s also demeaning, demonstrating a lack of trust, treating them like children. The Marginalist Revolution of 1871 proved hours/costs are not determinants of value, refuting Karl Marx’s labor theory of value, which you also seem to cling to for dear life. We’ve proven it in hundreds of firms that don’t use timesheets. Some of these firms are in your country. Some are in New Zealand, some in the UK, some in Canada. Most are Yanks.
I was taught in 1984 by Peat Marwick Mitchell that I sold time. Yet no customer buys time, hence no accountant sells it. How can we possibly sell something the customer doesn’t buy? This nonsense on stilts has been perpetuated by two generations of firm leaders and consultants to the profession. You are advocating a status quo that is already dying.
You wonder why there is a talent crisis in the profession? Well, stars don’t work for idiots. Knowledge workers now understand—certainly better than you and I did when we entered the profession—that the value they create is not predicated on the time they spend. It’s based on the quality of their work, their passion, dedication, professionalism, customer service ethic, innovation, creativity, mentoring, communication, interpersonal, listening, coaching and learning skills. None of these characteristics can be measured by your sacred timesheets. Timesheets do not capture the most important traits of a successful knowledge worker.
[I also suggest you read The Future of Management, by Gary Hamel (you’ll be happy to know he’s not a Yank). Read anything by Peter Drucker, especially his work on knowledge workers, emphasizing the difference between efficiency and effectiveness. Also, check out Stephen Covey’s The 8th Habit].
The talent crisis we face is the fault of current firm leadership, and consultants such as yourself, who keep the profession mired in the mentality that it sells time. We at VeraSage do not want one more single generation of knowledge workers to be taught these economically fallacious theories.
Therefore, we operate a think tank, not a consulting firm. We are dedicated to improving the posterity of the professions by removing the billable hour and the timesheet from all PKFs. We are disseminating our message far and wide, with emphasis on young professionals. We teach them they don’t have to be galley slaves on the SS Billable Hour. We teach them their value lies in their creativity and ideas, not accounting for every six minutes of their day like prisoners.
Our 15 worldwide VeraSage Fellows advance our cause in the arena of ideas, posit and test new theories, constantly read, think, and revise our theories. Most of them operate accounting, law, or consulting firms where they Value Price and don’t have timesheets. We have already transcended you and your old, anarchistic theories, moving on to greener pastures. Your ideas are past their sell date. You’ve done enough damage to our profession. It irritates the hell out of me that you continue to teach this nonsense to the younger generations. But that’s alright, the world needs its museums. The sunlight of truth is the best disinfectant.
In any event, we will free the professions from the tyranny of time. It’s merely a question of how long it will take to diffuse these theories. Comparing our progress to historical precedents, I’m encouraged.
You can bury your head in the sand, you can call us names, label us simplistic, ad nauseam. The one thing you can’t do is refute facts. Facts are stubborn things. And while you are entitled to your opinions you are not entitled to your facts.
For more information, you can read our Community Blog and Trailblazers Section of our Web site, where we have case studies from firms that are doing what you say can’t—or shouldn’t—be done from around the world.
It’s nearly impossible to debate with someone who claims that what is being done cannot be done. It’s not how civilization advances, and it certainly is not how the professions advance. Maybe Max Planck was right: Science advances funeral by funeral. So be it. The younger generations will be the ones who transform this profession, and they will be around a lot longer than you and existing firm leaders. Our job is not to leave them outdated legacy systems and negative intellectual capital, but rather useful theories and concepts they can build on to progress.
In the meantime, rest assured that the validity of a new theory is not determined by how many people are doing it. A theory stands or falls on its own strength. And the evidence is overwhelming that our theories work. Everyday, more and more enlightened firms adopt them. Some you may even know.
Of course, if anyone falsifies our theories, we will revise them, as this is how we progress. But you have failed to do that since your theories have already been falsified. We are always open to new and better ways to implement our theories. But so far you have contributed nothing new to the debate in the seven years since I became aware of you.
If you do respond to this letter, please make specific refutations of the evidence presented, not merely label it “simplistic.” I’ve provided incredibly deep specificity refuting your arguments, and the only way this debate will advance is if you do the same. Though I’m doubtful you will be able to refute anything contained herein since you clearly are not aware of most of the evidence.
A leading indicator will be if you post this letter on your Web site. I am posting it on ours. Feel free to respond to it there and let the debate continue. But be warned: You will be debating with people who live and breath this topic as much as I do, who do it every single day of their lives, who educate others about it, all of which means they understand it a level of depth you cannot even fathom. I wouldn’t show up to a gunfight with a butter knife.
If I were you, I’d be very nervous about my precarious worldview that has already been shattered by empirical reality. It’s not a matter of me being right and you being wrong, David. It’s an empirical test of what works. I have the courage to face the evidence, to be wrong, and subject my theories and ideas to the test of the marketplace. Do you?
I think you do.
After all, by your own tacit admission, this Yank was right about the future of Value Pricing. What makes you think he’s wrong about the inevitable death of timesheets?
Respectfully,
Ron Baker, Founder
VeraSage Institute
http://www.verasage.com
Dan Morris - 01/14/2008
Late last week, New Zealand lost a true hero. Sir Edmond Hillary, or Sir Ed, to those that had the pleasure of meeting him was both a gentle man and a true pioneer. I had the pleasure of meeting Sir Ed on two occasions; both times in San Francisco at meetings of the American Himalayan Society. Sir Ed was gracious in his humility and a constant fighting spirit about the beauty and opportunities associated with mountaineering. I learned in 1987 what Sir Ed learned nearly 35 years earlier. I learned that the Khumbu region near Mount Everest, transforms a visitor and permanent changes perspectives about what can be accomplished when one commits mind and body to achieve a goal and that with all opportunities comes risk.
I thank Sir Ed for leading the way for so many to follow. That the calling of the mountains lasts a lifetime and through constant devotion and attention the opportunities ahead, we can all move forward, constantly learning and making our world better along the way.
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