Community Section -
Ron Baker - 02/29/2008
Friend of VeraSage Brenda Richter, who maintains her own blog, wrote to ask that I post about this question from a Young CPA to AccountingWeb regarding tax season commitment.
You can see the comment Brenda made on the Site, and here’s what she wrote us:
A few weeks ago a young professional knowledge worker wrote to accountingweb because she was bewildered over her firm’s attitude toward tax season hours. It appears that she would rather come to work at 5 am much earlier than the others and then go home earlier than everyone else. The partners at her firm think she’s being a “slacker.”
I am reminded of Dan’s Work-Life Balance is PC for “Slacker” article, and quite frankly, anyone who is willing to be at work at 5 am is hardly a slacker.
Please give consideration to going to accountingweb and giving her the support she needs to finish tax season and then find a firm that will respect her as a professional knowledge worker.
It’s hard to believe firms are out there treating people this way, while wondering why they can’t find and inspire good people.
It’s not the people, it’s the crappy organizations they are forced to work in, with conditions redolent of sweatshops.
There’s probably a potential knowledge worker here open to a better working environment.
Ed Kless - 02/27/2008
Nothing continues to amaze me more than the breakdown the business world and perhaps in society of an understanding of basic logic. By basic logic, I mean what are known by Western philosophers from Aristotle, to Aquinas, to Ayn Rand as the Laws of Thought. The laws of thought are the fundamental rules of logic that prescribe how a rational mind must think. To violate any of these laws is to be irrational. For the record, they are:
- The Law of Identity
- The Law of Non-contradiction
- The Law of the Excluded Middle
Let’s take a brief look at each.
Law of identity. Sometimes referred to as the existence principle, this law simply states that everything that is exists. The thing is the thing. A is A. A table is table. We can agree to call the table a chair but that does not change the fact that, in essence, it is still a table. Abraham Lincoln is attributed as posing the following question, “If you call a dog’s tail a leg, how many legs does the dog have?” His answer was, “Four, legs are legs, not tails.” This law sounds almost absurd, but when combined with the next two laws it makes for a powerful system.
Law of non-contradiction. Also, known to strict logicians as the Law of Contradiction, this law is really the fundamental principle of all thought. The law states that nothing can simultaneously be and not be. It is this law that I see broken most often especially during project management meetings. Customers will ask for, and stupid professionals will allow, contradictory requests. “We need these additional tasks complete, but don’t go over budget.” Or, “We don’t have time to test the system, but we want complain about it if it fails.” Commonly, we also see this at work in people who are against certain aspects of value pricing. For example, Ron posted reply from Tom Kane earlier this week. Kane’s first paragraph read in part, “I didn’t say timesheets are needed to track costs.” Followed by, “The reason to track hours on a fixed fee matter is so you can determine whether a law firm is recovering its costs and making a profit.” This is clear violation of this law. Tom is being irrational, as are most opponents of trashing the timesheet.
Law of the excluded middle. This is the most difficult to understand, it states that each and every thing either is or is not. The best example is this example: I am either alive or I am dead, but I cannot be alive and dead. Morbid, I know, but it makes the point clear. The famous example of an attempt to falsify this law is the statement, “This sentence is false.” Many people are caught on this because it appears to violate this law, but it does not because it is a contradiction and therefore already irrational.
Many people challenge these laws under Karl Popper’s falsification principle, since these laws cannot be falsified, but then again, neither can Popper’s falsification principle. Until otherwise noted, I will be using these laws. This sentence is true.
Ron Baker - 02/26/2008
Tim Williams of Ignition Consulting Group and Ron Baker, in conjunction with the American Association of Advertising Agencies (4As), is proud to present a C-Suite Series of workshops on Advanced Principles and Practices of Value-Based Compensation.
This will be a series of three workshops, all to be held in Chicago. Thomas A. Finneran, Executive Vice President of 4As recently sent this letter out to agency members:
Dear Thought Leader:
To date, relatively few agencies have figured out how to evolve pricing based on the value of their agency’s work or the benefits that their clients derive. Value-based pricing is not easy (Then again, most things that are important and valuable are not easy). To help your agency move in the direction of value oriented compensation AAAA, Ignition Consulting and VeraSage Institute have developed a program for agency executives that are serious about getting paid based on the value of their ideas and work
AAAA C-Suite Series
Advanced Value-Based Compensation
Featuring Tim Williams & Ron Baker
Over the past several years, the American Association of Advertising Agencies has been evolving dialogue on alternatives to cost- and labor-based pricing. Most AAAA members appreciate that there are limitations associated with cost-based pricing and many agencies are interested in exploring possibilities for change...but few agencies have figured out how to evolve pricing based on the value of the agency’s work or the benefits that the client derives.
To help our members better understand the changing dynamics in agency compensation, the AAAA is pleased to introduce “Advanced Principles and Practices of Value-Based Compensation,” a compelling three-part course that features a progressive learning approach for C-level agency executive teams. Ignition’s Tim Williams has partnered with VeraSage’s Ron Baker to develop in-depth courses that will ground your agency in the principles of value pricing as well as help you implement alternative business models and value-based pricing.
As part of the AAAA C-Suite Series of management-oriented tools, “Advanced Principles and Practices of Value-Based Compensation” is thorough, timely and relevant. Value-based pricing is not easy. Then again, most things that are important and valuable are not easy. “Advanced Principles and Practices of Value-Based Compensation” will require a commitment on your part—time, money and focus. It is an investment of resource that AAAA management highly recommends.
To learn more about the three-part course and to access registration information, visit the ”Upcoming Events” section of the AAAA Web site, or click here.
If you have questions please feel free to give me call.
Tom
Thomas A. Finneran
Executive Vice President
American Association of Advertising Agencies
405 Lexington Avenue
New York, NY 10174-1801
(Tel) 212-850-0760
Tim, Tom and I hope to see you at these revolutionary workshops. Together we can begin to change the pricing paradigm of an entire profession.
Ron Baker - 02/26/2008
Again, hat tip to Chris Forsman, Sales Consultant with Accounting Micro Systems, who referred me to a company that “are installing RFID (Radio-Frequency Identification) tags on shelves in supermarkets and are able to control/change pricing of product at will through an access point connected to a central computer. If it is warm and soft drinks are moving fast at $3.00/six pack, they can at a click of a mouse, change the price to $4.00/six pack.”
This is an excellent example of how pricing strategies are always innovated by sellers, not buyers, as I’ve discussed before. The use of RFID tags in this manner is reminiscent of when Coca-Cola put thermometers in its outdoor vending machines that raised the price of a drink as it got hotter.
They retreated from that strategy when there was a public backlash. It would have been far better for them to lower the price when it got colder, as that’s perceived as being more fair, much like a high-end resort discounting its room rates from a premium “rack-rate” rather than raising room rates during “on-seasons.”
The use of RFID tags for pricing is in its infancy, but I assure you that professional pricers will be innovating strategies in order to price discriminate, segment customers, and charge different prices to different customers based on ability and willingness to pay—in other words, based on value.
The company Chris referred to is Altierre in Silicon Valley.
Ron Baker - 02/26/2008
Chris Forsman, a Sales Consultant and Sage Value Pricing Boot Camp Graduate with Accounting Micro Systems in San Francisco sent me an interesting article from Physorg.com, “Why Does Popcorn Cost So Much at the Movies?”
Before you go read the article, attempt to answer the question. Think about it, real hard. Hint: the answer is not obvious.
This is actually a topic that, believe it or not, had been studied by Walter Oi, an economist, for an article from the Quarterly Journal of Economics dating back to 1971.
I’ll freely admit that I’ve built a career out of asking and answering this question. Educated by the books written by Steven Landsburg and David Friedman—which ask and answer this provocative question along with many more—price theory had never come more alive for me.
Now I look at the world through an entirely new prism, trying to detect how companies practice what economists call price discrimination. It’s ubiquitous, as long as you understand the theory.
Here is how I answered the question, with the help of the brilliant Steven Landsburg, in the first chapter of my book, Pricing on Purpose:
Why don’t we observe movie popcorn price wars, similar to what other industries engage in from time to time? When asked this question, the overwhelming majority of businesspeople will answer because there is no competition—the movie theater has a captive audience. Other common explanations include:
- Limited selling time
- High fixed cost of operating concession stand
- It is how the theater owner makes a profit
- Higher clean-up costs imposed by snack eaters
- Tastes and smells better than you can make at home
- Part of the experience of seeing a movie
- Because people will pay for it
At first glance, all of these answers appear reasonable, except to an economist. The most popular response—captive audience—leads to the question of why there are no pay toilets in the theater? You are certainly a captive audience in that regard, but perhaps theater owners understand if they installed pay toilets they’d lose at the box office what they made from the bathrooms.
The high fixed costs, in terms of scarce square footage, equipment, fixtures, clean-up costs, and required employees is certainly a plausible reason, but does not really account for the large premium price of popcorn.
To say it is where the theater owners make their profits is definitely true, but begs the question of why they don’t make the profits from ticket sales and sell more popcorn at closer to cost?
Eating popcorn is certainly part of the experience of going to the movies [it began in the 1930s if memory serves], and people will pay for it, yet this explanation is still incomplete.
Assuming theater owners want to maximize their profits, what do the theater owners know the rest of us, perhaps, do not. The consummate economist Steven Landsburg provides the answer in his witty book, The Armchair Economist:
I believe he knows this: some moviegoers like popcorn more than others. Cheap popcorn attracts popcorn lovers and makes them willing to pay a high price at the door. But to take advantage of that willingness, the owner must raise ticket prices so high that he drives away those who come only to see the movie. If there are enough nonsnackers, the strategy of cheap popcorn can backfire.
The purpose of expensive popcorn is not to extract a lot of money from customers. That purpose would be better served by cheap popcorn and expensive movie tickets. Instead, the purpose of expensive popcorn is to extract different sums from different customers. Popcorn lovers, who have more fun at the movies, pay more for their additional pleasure.
This answer is more precise, since the important point is that “some moviegoers like popcorn more than others,” and the theater own cannot separate these customers when they are outside queuing up for the movie. A method was needed to separate the snackeaters from those who just want to watch the movie, which the concession stand provides since it allows customers to divide and self-identify themselves.
This may seem a subtle point, but it is highly profitable, since segmenting different types of customers allows the theater owners to charge them varying prices depending on the value received.
Students, children, and people with large families are usually more price sensitive, and not likely candidates to spend money on snacks. The theater owner doesn’t want to turn these customers away, and hence keeps the box office price lower by charging higher prices to snackeaters.
What you are really buying when you purchase a movie ticket is an opportunity set&mdash:a chance to enjoy the movie, or to enjoy it with popcorn. Economists call this a two-part tariff, defined as a pricing strategy in which the customer must pay a fee in exchange for the right to purchase the product. Examples abound of this strategy: country clubs charging membership fees and monthly dues; Gillette charging for the razor then the blades; amusement parks charging an entrance price followed by a price for each ride.
Some people recoil at the thought of price discrimination—charging different prices to different customers—claiming the practice is blatantly unfair and should be illegal.
But what would happen if the practice were outlawed? Theater owners, airlines, restaurants, and a myriad of other businesses, would have to increase prices for the very customers who are least able to afford a higher price—children, students, large families, senior citizens, etc.
By engaging in price discrimination, businesses are actually increasing social welfare and making more products and services available to the poorest members of society.
This is not to imply price discrimination based on race, gender, religion, or ethnicity, but rather based upon ability and willingness to pay. As this book will prove throughout, this practice is ubiquitous in any economy, and most price theorists agree it has a salutary effect on societal welfare.
If you found this answer for why movie theater popcorn is so expensive thought-provoking, welcome to price theory. The German poet Goethe thought double entry bookkeeping “Among the loveliest inventions of the human mind.” One should say the same about price theory, as it truly is “one of the great products of the human mind,” as economist Deirdre McCloskey explains in her textbook, The Applied Theory of Price:
The theory of price is one among the larger intellectual achievements of the nineteenth century, such as the theory of heat engines, the decipherment of hieroglyphics, the professionalization of history, the invention of abstract algebras, and the theory of evolution. Price theory explains much human behavior.
Since price theory offers tremendous insight into human behavior, it is worth the time and effort to study it in greater depth. It is sometimes said economics is nothing but refined common sense, which is certainly true.
Yet many myths about this crown jewel of the social sciences persist, even among businesspeople.
This is why those who study price theory in-depth reach entirely different conclusions about how businesses price their products and services. The economist’s toolbox is incredibly useful for deciphering how the world works.
Now that the theory has been explained, here’s the article first referred to above. It doesn’t refer to the 1971 article, but this is obviously not “new research.”
Still, it’s incredibly fascinating.
Ed Kless - 02/25/2008
WebCPA reported today the Lenny Dykstra former New York Mets and Philadelphia Phillies player is being sued by his accounting firm for $111,097 in fees.
The real kicker is this “...claiming that the charges have since grown to $138,872.” This is only possible under the Amighty Billable Hour, that a firm would send a bill out for over 100K, not get paid, and keep doing work!
Maybe some lawyer will take Lenny’s case and put the ABH on trial! Of course, said attorney would have to be a pricing with purpose firm.
Ron Baker - 02/24/2008
I’ll be conducting a Webinar for RainToday.com on Thursday, February 28, 2008 at 2:00 p.m. to 3:30 p.m. (EST) entitled: “Death To The Billable Hour: How To Develop Value-Based Pricing.”
You can register for this Webinar here. The price is $99 per connection.
If you do join us, a good follow-up Webinar would be the one I conducted for More Software on Trashing the Timesheet, which you can listen to in four parts, here.
I hope you join us!
Ron Baker - 02/24/2008
I’ve been having an e-mail discussion with Bob Harper, of More Software in the UK, during this past week over an article he wrote about the airplane analogy we use here at VeraSage.
Officially, it’s known as the Adaptive Capacity Model, which I used originally in The Firm of the Future to illustrate Baker’s Law: Bad customers drive out good customers.
A copy of the airplane diagram is one of the most frequent requests we get (see diagram below). It’s an enormously powerful analogy. We actually recommend that firms slide it across the desk to each customer, at least once a year, and ask “Where would you like to sit in our airplane.”
The model has implications for strategy, customer selection, de-selection, allocating capacity to different customers, offering, communicating and capturing various levels of value depending on where the customer wants to sit, and even more. It’s a powerful metaphor.
We’ve even had discussions about the model’s implications for project management (each project is a different plane, according to Ed Kless), team member leadership (each team member is an airplane, ala Dan Morris). You can see the endless ways you can expand this analogy.
But I’m a firm believer in Occam’s Razor--don’t unnecessarily complicate the theory. The reason the airline diagram is powerful is because almost everyone has flown. They know they have a choice of how much to pay and where to sit. They understand different customers get different levels of service and pay radically different prices, even for the same flight. But it’s not the same flight!
As a 1K flier on United, I recently flew to Spain on business. For me, that flight was vital, for if I didn’t arrive on time, the loss of goodwill would be incalculable. But for the leisure traveler, they’re not as time sensitive. Huge difference in value, even though it doesn’t cost United any more to fly me than him.
Also, people understand they may get bumped—actually, bribed with a free flight—from a flight to accommodate a 1K flier, or even sometimes a 1K flier gets bumped to accommodate an even more valuable flier, say a One Million Mile flier.
There are many implications, but I want people to read into the model what is important to them. For one firm leader, they may have too many people in the back of the plane, so it may inspire them to shed customers and free up some capacity. For others, the message may be they have to do a better job differentiating customers based on various levels of value.
Here is what I wrote to Bob after a few emails that I thought were getting too complex:
Bob,
You can see how easy it is to take this metaphor of a plane to extreme levels. Some of our VS Fellows think that each team member in the firm represents a different plane, with it’s own capacity, competency level. We can take this analogy too far.
Bottom line is this: Any firm can only handle so many customers, given its existing size. What we refer to as the firm’s Theoretical Capacity.
- How many customers do they want in each class? This is the firm’s Optimal Capacity, which is probably 60-70% of its Theoretical Capacity.
- How much capacity should they reserve for their best customers and team member down time?
- When should they stop adding capacity for back-of-the plane customers?
- What is the value proposition for each section of the plane?
And here’s the biggest question of all: Where does the customer want to sit?
The firm DOES NOT decide this, the customer does. How? Ask them. We have firms who slide the picture of the plane over to the customer and ask, “Where would you like to sit in our plane.” This forces the firm to communicate the value proposition for each section of the plane, just like the airlines have (quite effectively I might add).
Keep it simple with this. I know from experience how we can add many layers of complexity that don’t mean a whole lot. People will draw their own conclusions from the metaphor, that’s the beauty of thinking for one’s self.
Ron
I’d love to know what the Airplane diagram meant to you when you first saw it, and how it has changed how your firm views it value proposition, pricing, customer selection, etc.
As Aristotle said: “But the greatest thing by far is to be a master of metaphor. It is one thing that cannot be learnt from others; and it is also a sign of genius, since a good metaphor implies an intuitive perception of the similarity between dissimilars.”
Ron Baker - 02/20/2008
Readers familiar with VeraSage know how much respect we have for Reed Holden. Reed has been my mentor ever since I met him at a Professional Pricing Society conference in 2000.
He co-authored, with Tom Nagle, The Strategy and Tactics of Pricing, which I consider to be the seminal business book on pricing—the best one ever written.
I’ve written about Reed many times on this Blog, even about our disagreements. Also, Reed, along with his colleague Mark Burton, wrote Pricing With Confidence: 10 Ways to Stop Leaving Money on the Table, which I reviewed here. This is a must read for anyone who takes pricing seriously.
I’m happy to announce that Reed has launched his own Blog, Pricing With Confidence. Along with the Holden Advisors newsletter, this is a must-read source of pricing wisdom from one of the titans in the field.
Ron Baker - 02/20/2008
Great article in Ad Week about Ground Zero, an advertising agency in Southern California, which has taken an equity stake in a new premium Vodka brand—Pinky Vodka.
Steve Koskela is the CFO of Ground Zero, and he’s responsible for me working with advertising agencies and marketers, since he introduced me to Tom Finneran at the 4As. Then Tom introduced me to Senior Fellow Tim Williams of Ignition Group. A great example of how social capital creates wealth.
Congratulations to Ground Zero, Crispin, Anomaly, among other agencies that are beginning to build their own portfolios of intellectual capital.
It is ideas that create the majority of wealth, not the mere act of carrying them out. Agencies are beginning to figure this out.
Ron Baker - 02/20/2008
I recently posted about Tom Kane suggesting to Jay Shepherd that he needed to maintain timesheets in order to determine cost and profit margin per job.
I wrote in my post that if the Shepherd Law Group was smart, it would ditch timesheets. Well, it has, according to Jay Shepherd himself.
Jay weighed in with his own response to Tom Kane. It made my day—I’ve been called a lot of things over the years of arguing for the total elimination of the billable hour and timesheets, but never have I been compared to Martha Stewart:
Ron Baker is the founder of VeraSage Institute, a think tank dedicated to helping professional-service [knowledge] firms rid themselves of archaic billing practices. He is the author of Professional’s Guide to Value Pricing, which is the ultimate hornbook on the subject. Having Ron publicly defend your billing practices is like having Martha Stewart compliment your table setting (only without the whole jail thing).
Thanks Jay, LMAO! You always say you owe me dinner when I’m in Boston. Well, I owe you the second one.
Congratulations again on your firm’s decision to blaze the trail for others.
Ron Baker - 02/17/2008
I don’t know Tom Kane, but thanks to Stephanie West Allen for sending me a recent Blog post of his, ”Has Your Firm Tamed That Damn Billable Hour Yet?”
It’s utterly amazing to me how someone, on the one hand, can say they support Value Pricing, and then on the other insist that timesheets are absolutely necessary. He’s arguing they are necessary from a cost accounting perspective, which is nonsense.
We at VeraSage have dealt with this so many times, I’m not sure what else to say. It’s get tiring informing people who should know better that there are, indeed, firms that operate without timesheets. What does it take to get them to see this?
Here’s the comment I left on Kane’s Blog:
Tom,
You write:
You can’t make a profit on fixed fees unless you know what your costs are;
You can’t know what your costs are unless you know how much time (and other dollars) are consumed by the matter; and
There is no way to know how much time is being spent on matters if you don’t keep track of hours!
Duh!
No, not Duh. There are over 500+ firms worldwide, across all professional knowledge firm sectors, from advertising to CPA firms and law to IT consulting firms, that don’t do timesheets.
This doesn’t mean they don’t know their costs, it’s a question of WHEN do they know their costs. With timesheets, you only know them in arrears. With our methods, you know them BEFORE you do the work.
What good is it to know your costs if the client doesn’t like your price? This is known as price-led costing; Toyota has been using since it was founded in the 1880s, and Toyota does not have a standard cost accounting system (nor do they do timesheets).
In the real world, value drives price, not costs. Price actually drives costs, so it makes sense to know value and price before you spend a nickel on any costs.
So, what replaces timesheets?:
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
All of the above add to a firm’s intellectual capital, whereas timesheets destroy intellectual capital, especially human capital, who are treated to tracking every six minutes of their lives. Timesheets keep professionals mired in the mentality they sell time.
It is the Quest of my think tank, VeraSage Institute, to rid all professional knowledge firms of both the billable hour and timesheets, as they inextricably linked. You simply can’t Value Price if you’re paying attention to hours.
If you support Value Pricing, you must reach the conclusion that timesheets hinder its adoption. He who says A must say B.
Our Trailblazers section is full of firms that don’t maintain timesheets. Usually, people who say something can’t be done are being blown away by others already doing it.
You will find many other resources, free books, articles, case studies, and blog posts, all on how firms can enter the 21st century with Value Pricing and no timesheets. A good start would be here.
I just wanted to set the record straight. If the Shepherd Law Group is smart—and they are—they will trash timesheets. They are the cancer in the professions; it is just a matter time before they will be buried.
Cordially,
Ron Baker, Founder
VeraSage Institute
http://www.verasage.com
This is more evidence that the world doesn’t need consultants.
Ron Baker - 02/14/2008
I recently wrote about Mark Chinn, a family law attorney from Jackson, Mississippi whom I had the pleasure of meeting last month in Orlando, Florida. Mark’s firm, Chinn and Associates, is one of our Trailblazer firms. He does 100% Value Pricing and is in the process of trashing his timesheets.
Mark has practiced for thirty years and is listed in Best Lawyers in America in Family Law and has written two books published by the ABA on running a family law practice and contributed to two other ABA books. He has also published an ebook, “Dumping the Billable Hour, One Lawyer’s Experience.” All of this, and more, can be found at the firm’s incredible Web site.
Mark picked up my two latest books in Orlando, Measure What Matters to Customers: Using Key Predictive Indicators, and Mind Over Matter. The other day Mark sent me this email, creating another HSD!
Ron,
I have just completed reading Measuring What Matters to Customers. I couldn’t put it down and finished it off in three days. As I was finishing it I had the mixed emotion of being pleased to finish your message, but sad the story was coming to an end.
You know I have kidded you about how academic Professional’s Guide to Value Pricing was. Well, Measuring ranks right up there as an academic masterpiece, which is important in this day and age when it seems that everybody is just writing what they think. You should have been a college professor and your book would be worthy of text at Harvard Business School.
I have been using business coaches for my family law practice for 20 years and I have read at least a hundred success and management books and I have lectured all over the U.S. and Canada and there are many previously unearthed gems in your book.
First, traditional numbers usually don’t help. I have been telling my advisors and support staff for years, “These numbers don’t seem to help. I can be enjoying an unbelievable trend and then...boom, no business” Or, “No, there are no seasonal trends, sure some people put off divorce during the holidays but sometimes the holidays prompt other problems.” Being told by you in no uncertain terms that there is no certainty is a blessing. Thank you. Other points of import:
- Each customer is different. (That’s what the last one insisted in his recent exit interview...that he was different). So, focus your efforts on each one, not solely on a system for pleasing all.
- We need to pick three leading indicators, and the team needs to do it.
- Team workers are “knowledge workers” and “volunteers” and it is important to call them that and treat them like that.
- With good team members management needs to get out of the way and not demoralize them with negative feedback or scoring; and we further need to eliminate systems and procedures which interfere with what they are doing. We need to release our grip on our systems and ask the team members what systems help and what gets in their way.
- Measuring the wrong thing accurately can throw you completely off. Take time to carefully analyze situations outside of the facts. Your example about the World War II Bombers was unbelievable. The first thought was that the returning planes needed more armor where the bullet holes were. But Abraham Wald came to the opposite conclusion: that the armor needed to be placed where the bullet holes were not because the planes that made it back had survived even though being hit where they were.
- Being efficient at something irrelevant is a sign of impending disaster.
- The real things of value in life cannot be measured, something my more introspective teammates have been trying to tell me for years.
It takes courage to go against the grain and that is what you have done. Keep up the good work.
Wow, thanks Mark. Don’t read Mind Over Matter, I’ll quit while I’m ahead.
You haven’t seen the last of Mark Chinn around VeraSage.
Thanks Mark. You are too kind.
Ron Baker - 02/14/2008
VeraSage Senior Fellow Brendon Harrex is an amazing visionary in the New Zealand accounting profession. After becoming the world’s first Chief Value Officer, as well as being named Young Chartered Accountant of the Year in 2006, he then went out on his own and launched the Harrex Group.
Brendon’s new firm is 100% Value Pricing and no timesheets. In October last year, he presented at the VeraSage Young Professional CPE program, along with Chris Marston. Given Brendon’s role as a thought-leader—and a thought-doer!—his advice is sought out from all over the world.
Last month, Brendon and his CEO, Nicki, had a conversation with a USA accounting firm that is making the transition to Value Pricing, and eventually, no timesheets. As we at VeraSage firmly believe in After Action Reviews, Brendon sent me an email with highlights of the phone call.
I think you’ll find Brendon and Nicki’s insights profound in the area of practice management and customer relationships.
Hi Ron,
Yesterday, Nicki (Harrex Group CEO) and myself spent a few hours on a teleconference with the firm. I was thrilled to hear that they have made the decision to trash timesheets next year. A summary of what we covered in our conference call is as follows:
Practice Management
We had a great discussion on how to manage an accounting business in the absence of timesheets, including how to manage workflow, how to assess people’s performance, and how to ensure that outcomes agreed with customers are being achieved. We gave them many insights into our learning and detailed for them how we manage our workflow, which is both compliance and project based. We talked about our KPIs and how we believe it comes down to an organisation having a collaborative culture rather than a competing one (as often occurs in firms with silos by partner). Our strongest message here was to emphasize the critical importance of performance management. This includes understanding your people and keeping ahead of their performance, rather than crucifying them at month end when you find out they have taken too long on a job, yet give them no help with how to improve it. A key part of this is because no clear expectation has been set at the start.
Customer Relationships
They had several questions here regarding how to involve the customer in the pricing process, how to understand what they value, and how to avoid replacing timesheets with a cost plus premium system, rather than relating it to value perceived by the customer.
In summary, we explained our learning as follows:
- Never price or give an indication of price at the first meeting with the customer, as usually they will have not properly considered all the ways you could add value and assist them with their objectives.
- Open communication and input is the key—you have to centralise pricing control, as everyone has different pricing abilities. If crappy pricers know that they have to have their process and pricing reviewed by either an individual or a group, they will price differently than as if they can do it in isolation with the customer. We involve at least two other relationship managers, a tax specialist, and an accounting team representative (usually) in the pricing process. The purpose of this is to ensure we have thought of all the ways we can add value for the customer and provide them with a fully fleshed out scope for the engagement.
- Collaboration—we explained the critical importance of operating together rather than competing. This is particularly important as first class passengers must take priority over economy class, regardless of who the relationship manager is. Often we will need the skills of another relationship manager to assist with a customer and it may be that one of the relationships they are responsible for will have to take a back seat. In order for this to work, all within the organisation must understand that we are all about the success of the business, not just one silo.
- The conversation with the customer is crucial to understanding what is important to them and where they want to go. Once you understand this, your entire solutions should be tailored to helping them achieve their objectives and this is how the most value can be extracted for the business, because this is most valuable to the customer.
Ron, isn’t it ironic that the two essential skills to make value pricing work are performance management and selling, yet these are what is most lacking in a traditional professional knowledge firm!
Both Nicki and I really enjoyed our conversation with the firm. They were a pleasure to work with and very open minded. We have tried to create the expectation for them that if they are to achieve the 2009 deadline for trashing timesheets, they need to communicate they are serious about this. They should expect to have to discipline some partners, change several roles around, and probably lose a few along the way. This is just a reality of change—some people will not cope.
Regards,
Brendon
Thanks, Brendon. Words of wisdom we can all learn from.
Ron Baker - 02/13/2008
Back in September 2007, Rob Lewis of AccountingWeb in the UK wrote a provocative piece entitled “In defence of the billable hour!”
He stirred the hornets nest with that post; as a matter of fact, it’s still drawing comments as late as today, has been read 3,883 times and attracted 67 comments as I write this. In fact, now the comments have equated Value Pricing with religion. Though some of these comments are witty as hell, especially the one by Allan Mackie, I must say that Value Pricing is based on sound economic theory.
The technical name is price discrimination for those who want to research it further. This is a theory that goes back to the 1880s, but was really developed well by the 1920s. It has nothing to do with religion. Nor does trashing timesheets. This is based on empirical evidence, from firms that have done it. Not quite a religion.
In any event, Rob is back today with another post ”Value pricing: a debate without end.” This one is less provocative and much more reasoned. It appears based, at least partly, on an interview I had with Rob after his last piece. I found Rob to be very intelligent, someone who asked penetrating, tough questions. It’s obvious to me that he is wrestling with this issue. Good. He should, as should all of us—I still struggle with it!
I actually liked this article by Rob. It’s already attracted four comments, the first being from VeraSage Senior Fellow Paul O’Byrne [I know, amazing, but that’s another story. I’ve posted a longer version of Paul’s comment in the comments section to this post]. Rob’s piece is balanced, well reasoned, logical and he does quote me accurately, which I’m grateful for.
I would like to clarify just a few points from his column. I will let others go further with this discussion, such as Eric Fetterolf—one of our Trailblazers—who has already commented. I’m sure there will be many others. This is certainly not the last word on this topic.
I like Rob’s opening question in the first paragraph: “Will value pricing remain on the sidelines, or is it about to enter the ascendancy?” It’s an excellent question, one we at VeraSage have pondered long and hard. Rob reported my view on how this is a new theory, and germ theory took the medical profession centuries to become widely accepted. There are many more examples. I wrote an article about it: The Diffusion of a New Idea.
A little further down Rob writes that I believe the accountancy profession should be “defined above all else by what it can charge for.” Well, that’s not quite right. We do say a business is defined by that for which it charges. But what it really means is the accounting profession should be judged based on its ability to create value, not just capture it with better pricing. Any organization, from a government hospital to a non-profit, is judged, ultimately, by the results it creates outside of its four walls, something Peter Drucker called the marketing concept.
Then Rob explains how the billable hour became common between the 1940s and 1960s, proving a new theory can diffuse relatively rapidly. True enough. There was enormous pressures and technological factors that led to the rapid diffusion of the billable hour. There was also no VeraSage Institutes questioning the economic theory behind such a change. A herd can move damn fast once it gets going.
But I would remind everyone that scientific truth isn’t determined by majority vote, or consensus. Science, like business, progresses based on dissent. The logic and economic theory behind the billable hour was always weak, and that doesn’t change just because a majority of a population does it. In fact, if you want to get technical, most of the business world does not price by the hour, so the minority is really the PKF sector that clings to the billable hour.
Rob then writes, “Pricing itself is a tricky and intricate activity,” noting the existence of professional pricers. Yes it is. So what? Does that mean firms shouldn’t do it? Or shouldn’t develop a core competency in doing it? Nearly all of the Fortune 1000 have pricing professionals, demonstrating the benefits outweigh the costs of investing more creativity and intellectual capital into this function. All we are saying is firms should do the same. Is it any different than benchmarking best—or perhaps, next—practices?
But here is where Rob loses me. Let me quote him:
It’s also an aspect of value pricing where the theory contradicts itself somewhat.
Value-pricing is supposed to create a market-led, client-focused competitive marketplace. It’s also supposed to boost your profits. And that is a big paradox.
‘Of course we’re professionals, but we’re also business people,” Baker argues, ‘and I don’t see anything unseemly about charging a price centered around the value you create. Sometimes that could very well mean a lower price.’
Really? Rather than invoicing your billable hours and charging, say, £1500 (which you believe they will happily pay), you value price, decide what your work is really worth to the client, and charge £1200. For most people, that would be a decision that flies in the face of normal economic behaviour. And the problem theoretically, of course, is that the market isn’t really making that decision: you are.
There’s no contradiction here with Value Pricing. Again, it’s classic price discrimination, and overwhelming empirical evidence proves it does add to profits. What price discrimination says is quite simple: With a downward sloping demand curve—which economists call having market power—if a business can then segment those customers who are willing and able to pay above the so-called equilibrium price, then the marginal revenue will add to profits [click on the supply and demand graph at the end of this post. What any business is looking for are customers in the shaded area, those willing and able to pay more than the equilibrium price. This is how price discrimination works in theory. There’s more to it than this, there are different degrees of price discrimination, but this is the essence of it. For those wanting a deeper explanation, see my Pricing on Purpose book].
In the real world, there are myriad examples of this being done: from airlines, hotels, rental car companies and cosmetics, to hardcover vs. paperback books, liquor, wine, beer Coke, etc. I document dozens of examples of this in my books. There are literally thousands.
There’s no contradiction in that theory with the real world. Something simple as your local Starbucks menu is an example of price discrimination in practice.
Rob then poses an example of £1200 vs. £1500 price and says the market isn’t making the decision, you are. But you’re not making the decision, the customer is, since they are given a price before you do the work. I would also add, markets don’t buy things, people do, and value is subjective. Accounting firms can meet with each and every one of their customers at a very low marginal cost, so it behooves them to determine the value of what they are doing for each customer.
If the airlines had the ability to interview you before your flight to determine if it was travel for business or leisure, they’d be able to customize a price based on the value of your trip. The problem is, the costs of doing that exceed the benefits, so they develop clever rules to segment customers—Saturday layovers, how close to departure are you purchasing your ticket, etc. But that’s not true in an accounting firm; they meet with each customer anyway, so the marginal costs of determining value are negligible.
Rob them writes that only firms that offer exceptional service and highly specialized knowledge are able to value price. He even writes: “But for the average firm, value pricing may not be the way to go. One issue could be that you end up charging clients wildly different sums for the same work.”
But why is value pricing not right for the average firm if the economics make sense? I guess I have more faith in the average firm than does Rob, because I see firms of all sizes and shapes that have adopted value pricing successfully.
Now the charging different prices for the same work is truly a straw man argument. Mark Lee has an excellent comment (#4) on the post that talks about the more common scenario. But let’s deal with this straw man head on.
If a firm does a large volume of tax work, say hundreds or thousands of returns, then many firms offer a menu price service: A sort of American Express Green, Gold, Platinum card offering. If all the customer needs is the minimum bundle, then prices will be the same across customers that select that bundle.
It’s when you get into the customers that require more than minimal compliance services where you customize a Fixed Price Agreement, and this is where no two customers are exactly the same. As I say, there are strategies that can deal with the charging different customers different prices issue, if you are willing to research them. For an example of a menu strategy from an Australian firm, see here.
Then Rob claims the billable hour prevents this problem. But does it? Two partners can charge radically different prices for the exact same work, depending on their level of self-esteem and who works on the jobs. People can lie on their timesheets. People can eat time. You can’t tell me the billable hour produces the exact same price for similar customers. Fixed prices are far more likely to do so.
Rob ends on a discussion of trashing timesheets, and says it’s a leap of faith. Really? There are 500+ firms that have done it, across all PKF sectors, from advertising agencies to IT firms. How can that be a leap of faith? They are not a good management tool, we have provided many replacements that actually enhance the value of a firm’s intellectual capital far more than timesheets.
All that said, I love Rob’s last sentence:
But surely the simplest way for most accountants to make sense out of value pricing is to forget about the pricing bit, and just concentrate on becoming more valuable?
Amen. A firm must first create more value if it wants to capture more value. This takes hard work. It takes creativity, innovation, and deep thinking. It’s why most firms have not made the shift to Value Pricing.
Rob, you answered your own question. If you’d like, we can arrange for you to interview any of our Fellows and talk with them in-depth about how they Value Price and operate firms without timesheets. I’d start with O’Byrne & Kennedy since they are in your backyard. I’d be more than happy to introduce you to others, or you can contact them yourself, under People on our Web site.
Thanks for furthering the discussion, Rob.
Supply_Demand_Graph.pdf
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